Have you ever considered how your estate plan might hurt your children’s marriages? Not only can an inheritance be vulnerable in a divorce, but it also can undermine the marriage itself.
Some clients awhile back lamented that one child was going through a divorce. “Going into the marriage, I’m sure they didn’t plan to end up divorcing,” said the mother. Her comment inspired some discussion, and we agreed that no one plans to divorce. More likely, people get divorced because they didn’t consciously nurture the marriage. They divorce because they didn’t plan to stay married.
It is as natural as breathing for us to want what we give our child to stay in the family if there is a divorce. If you doubt that, what do you think the other parents want? I can tell you, they feel the same way about what they are leaving to their child! In several decades of estate planning, I’ve only met one client who said, “If my son’s spouse left, she should get the inheritance instead of him.” He must have been a rascal!
I’m no divorce lawyer, but because clients want the protection in their estate plan, it is essential that I know a bit about divorce and inheritance, both technically and practically.
Marital or separate property?
Let’s say your daughter inherited 40 acres and $250,000 from you, for a total of $600,000. That $600,000 is her separate property. By contrast, what she and her husband acquire or own together is considered their marital property. If they divorce, the court divides their marital property between them in what it considers an equitable manner, but the court won’t award him any of her separate property. The $600,000 might seem technically safe.
However, if at the time of her inheritance your daughter is happily married, what will practically happen to the $600,000? She and her husband discuss this windfall, and she has two options. Option 1: They agree that it would be good to use some of the money to pay off their joint mortgage, and to put everything else in their joint names — that being the standard, but ill-advised, do-it-yourself way to assure that it automatically goes to him if she dies first. Option 2: She says, “I have to keep this in just my name … you know, in case we ever get a divorce.”
This outright inheritance places your daughter in an awkward dilemma. The first option converts her separate property into marital property, forcing her to gamble her inheritance. The gamble might turn out fine, but we know that the divorce rate is still close to 50%. The second option essentially plants seeds of distrust in the marriage, even if there were none.
Thoughtful planning can protect not only the inheritance but also your daughter — or son, since this all goes both ways — from this awkward dilemma.
No awkward options
That daughter whom you completely trust with an inheritance? In your estate plan, say that upon your death she receives the 40 acres and $250,000 in trust. She can have broad control of the trust, including the right to choose how to invest what is in the trust, and the right to receive and spend the money to live comfortably. So long as she doesn’t need to spend the assets, they must remain invested within the trust. But anytime she needs money, the trust can distribute it to her to spend. Whatever has not been distributed and spent cannot become marital property. The trust assets will remain completely off the table from any divorce.
While she has essentially the same benefits from her inheritance, neither awkward option is on the table. Her conversation with her husband now sounds more like this: “My parents gave me a trust that protects the inheritance from lawsuits and helps reduce our income taxes. But I can get money out as needed, so we can take vacations, cover the kids’ education, maybe trade cars. Whatever we don’t need to spend right now will stay invested in the trust.”
So long as he is happily married to your daughter, your son-in-law will benefit from the existence of the trust. If he is still married to her on her death, she can leave what is left to him. The inheritance provides incentives for a lifelong marriage.
You could place more restrictions on the daughter, if it is her judgment you question. But that is a different issue and would warrant different terms in the trust.
Planning to promote marital harmony is just one more way to do all the good you can with your estate plan.
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com. The opinions of this writer are not necessarily those of Farm Progress/Informa.