Planning for Life

How to Protect a Child's Inheritance from Divorce in Massachusetts

Posted by Harry S. Margolis on August 24, 2021

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By Harry S. Margolis

family-protection-trusts-margolis-bloom-estate-planningParents 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

For example,

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.
 

For example,

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.

Structuring the Family Protection Trust

The strongest way to structure these trusts is to appoint an independent trustee and give the trustee complete discretion on how and when to make distributions to beneficiaries. 
Many children object to the lack of control they have over such trusts and to the independent trustee's annual fees.
 
It's also possible to structure the family protection trust so that the child beneficiary acts as trustee and manages the trust funds, but only has access to income generated by the assets. In order to gain access to the principal if needed, they would have to appoint an independent trustee at that time.This approach saves money in trustee fees, gives the child significant control, and allows the trust fund to act as a reserve in case of further need so it's not depleted on day-to-day living expenses. The risk is that the child does not follow the trust rules and dips into principal, which would undercut all the trust protections.
 
Each client considering a family protection trust can consider the approach that makes the most sense in their case, discussing the pros and cons with their attorney.
 
Related articles:

Getting Together Later in Life? Put Your Intentions in Writing

7 Reasons to Create a Family Protection Trust, and 4 Not To

Considerations in Making Gifts to Your Grandchildren - Massachusetts

Topics: divorce, creditor protection, family protection trust

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