Protecting Inheritances From Divorce

3 Ways to Protect Inheritances for Married Children

Presented by Brian Bisdorf CRPC©



Statistics suggest that a high percentage of marriages will end in divorce. Although you may not be concerned about your own marriage, are you worried about protecting the assets of your married children?


Everything may be rosy now, but it’s not uncommon for people’s perspectives (and personalities) to change during a divorce. If that happens, what do you want for your children’s inheritance? Would you continue to provide some level of financial support to your child’s ex-spouse once he or she is no longer part of the family? Or would you prefer to omit this support for your former son- or daughter-in-law? If you wish to protect your child’s inheritance, several planning options are available.


The First Line of Defense

Premarital agreements. For many high-net-worth individuals, particularly those with a family business or other generational family wealth, the first step may be to encourage your child to address the need for a premarital agreement—a binding contract between the prospective spouses that defines their rights in the event of a legal separation, divorce, annulment, or death. Although it can be an effective planning tool if executed correctly, a premarital agreement does require the child’s involvement and can raise emotional concerns for the couple (“I love you so much and will always take care of you, but can you sign this premarital agreement?”).


Postmarital agreements. In contrast, postmarital agreements are entered into after the marriage. Initially, the enforceability of these agreements was in question. In recent years, however, they have increasingly been upheld by the courts, particularly if they follow the requirements of the Uniform Premarital Agreement Act or other state law governing premarital agreements. Nonetheless, postmarital agreements are still in their legal infancy and are considered less reliable than are premarital agreements.


Trusts: A Secondary Level of Protection

Trusts can also be a worthwhile tool if you wish to retain control of or protect potential inheritances.


Common distribution techniques. In a divorce, the battleground is often the question of whether the beneficiary has a right to receive the trust property. Keeping your family’s circumstances in mind, you should weigh the benefits and drawbacks of various distribution methods with your attorney. Popular trust distribution techniques include the following:


  • Outright. The funds are distributed outright and free of trust, no strings attached. This technique is often favored by individuals with mature, financially astute children. This distribution standard offers little to no asset protection.
  • Mandatory income/discretionary support. Mandatory income provisions require the trustee to distribute income annually (or, quite commonly, at a more frequent interval) and provide distributions of principal either under a standard such as “health, education, maintenance, and support” or at the trustee’s total discretion. The trust will not provide asset protection for mandatory distributions, and if the beneficiary can demand assets, they may be available for asset division.
  • Staggered distribution. Trust assets are distributed in intervals, such as when the child reaches certain ages (e.g., 1/3 at 25, 1/3 at 30, and 1/3 at 35). These provisions are frequently used as a measure to keep the child from squandering the inheritance; on the positive side, they make funds available to the beneficiary at ages when major events, such as marriage or purchasing a first house, are likely to happen. Until the triggering ages are reached, the trustee typically makes discretionary distributions. Any mandatory distribution may be considered available and part of the marital estate.


The benefits of a corporate trustee. Because it removes the perception that family dynamics are part of the distribution decision, a corporate trustee may be more effective than a family member trustee. Through my relationship with Commonwealth Financial Network®, the Registered Investment Adviser–broker/dealer that I partner with to help me better serve you, I have access to several personal trust service companies. Each of these companies is experienced in all types of trusts, including life insurance, charitable, multigenerational, special needs, and minor trusts.


Striking the Right Balance

Remember, before putting any of these measures into play, you should consider which strategy will deliver the balance of flexibility, control, and accessibility that you desire. Although it’s impossible to predict the future, with careful planning, you can help ensure that your children’s inheritances are protected according to their wishes.


This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.


Bisdorf Palmer, LLC is located at 201 American Concourse, Ste 310, Fort Worth TX 76106 and can be reached at 682-224-4001. © 2020 Commonwealth Financial Network®