Everyone knows the statistics – almost 50% of marriages in the United States end in divorce. Second and third marriages fail at an even higher rate. Our clients are rightly concerned about passing down wealth to their children that may end up in the hands of an ex-husband or wife. Some clients’ initial thoughts are to disinherit a child just to avoid inherited assets going to a spouse. There are more efficient, less dramatic techniques to ensure an inheritance stays in the bloodline.
How Does Divorce Law Treat Inheritance?
When a couple gets divorced, the court attempts to divide the marital property as fairly and equally as possible. This doctrine of Equitable Distribution considers factors such as the length of the marriage, age and health of each party, and the earning power of each spouse. Under New York law, “marital property” is broadly defined as property acquired by one or both spouses during the marriage. “Separate property” is defined as property acquired by an individual prior to marriage. Separate property is not subject to Equitable Distribution.
However, certain types of assets acquired during marriage are not subject to Equitable Distribution. Inheritance, gifts received from individuals other than one’s spouse, and personal injury compensation are considered separate property. Since inheritance is considered separate property in New York State, it may appear that a child’s inheritance does not need protecting, but this is not the end of the story.
Beware of Commingling
Inheritance is considered separate property in New York State – except when it isn’t. Separate property can become marital property if “commingled” with marital property. For example, if a child were to deposit their inheritance into a joint account with their spouse, use inherited assets to purchase a home titled jointly, or his spouse contributes to the maintenance and capital improvements of inherited property, the assets would become commingled and thus subject to Equitable Distribution upon divorce.
How to Protect Inheritance from Divorce
The best action you can take to prevent commingling from occurring is to leave your children’s inheritance to them in a trust. The type of descendant’s trust does not need to be complicated. The trust can be created in your own Will or Trust and only come into existence at your death. Your child can act as their own trustee and make distributions to themself. Importantly, the trust adds a layer of separation, better protecting the inheritance from a divorcing spouse and creditors by maintaining its status as separate property.
Moreover, with a trust you can control the remainder beneficiaries of the property you leave your child after their death. If you were to leave an inheritance outright, then your child’s own Will would dictate how their estate were to pass. Most couple’s leave assets to their spouse and upon the surviving spouse’s death to their children. But with a trust you could stipulate that upon your child’s death any remaining assets pass to your chosen beneficiaries. This could be your grandchildren, your other children, your favorite charity – whomever you wish.
We would be happy to discuss your goals and family situation to determine the best way to incorporate a descendant’s trust into your estate plan. There are many ways to leave an inheritance that ensures your wishes are followed and assets are protected.