Parents are often concerned about whether the inheritance they leave their children will stay in the family in the event a child is divorced or passes away. Typically for long-term marriages, in the event of divorce, all assets are split down the middle no matter their source.
Divorce or Remarriage Can Disinherit Children and Grandchildren
Bob and Jane marry, embark on a life together and have children. Years later, Jane's parents die and she inherits a nest egg of $500,000. After the children leave home, Bob and Jane decide that they'd be much happier going their separate ways and divorce. In all likelihood, half of Jane's nest egg will go to Bob.Or the couple may stay married for life, but after one spouse dies the surviving spouse may remarry with all of the first couple's assets flowing to the new spouse and ultimately her children from a prior marriage.
Bob and Jane do not get divorced, but Jane passes away. After several years, Bob meets Myrtle, they fall in love and get married. At first, they keep their property separate and each has an estate plan giving their property to their children from their first marriage. But over the years, Bob and Myrtle merge their assets. Bob passes away first and everything goes to Myrtle. Upon her death, Bob and Myrtle's combined estate goes to Myrtle's children.
That is not necessarily the desired outcome and can be avoided with proper planning, but many people do not take control, instead allowing events to occur with unfortunate outcomes.
But Parents and Grandparents Can Set Up Protections
Fortunately, parents can set up their estate plan to protect whatever they leave to children from divorce, creditors and happenstance -- in short, to keep it in the family. They can do this by leaving their estate in trust rather than outright to children.
These trusts come under several names: "generation skipping," "spendthrift," "asset protection," or "dynasty" trusts. In our practice, we call them "family protection" trusts, since that's their purpose.
In essence, they take advantage of a longstanding feature of trust law, that you can't create a trust for your own benefit and protect it from claimants, but you can create a trust for other beneficiaries and protect the trust property from their creditors, divorce or lack of planning. The trust property will:
- Be protected from the beneficiaries' creditors.
- Pass to whoever the trust names upon the death of a beneficiary.
- Not be included in the marital estate in the event of divorce.