A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage
If you don’t want money you’ve worked hard for to pass down to your son’s or daughter’s ex, then consider a trust.
A large number of my clients today want a trust built into their wills. But the No. 1 reason may surprise you.
With the estate tax exemption in 2017 at nearly $5.5 million per person or $11 million for married couples, setting up a trust to save taxes upon death is not as much of a driving force as it used to be. Instead, more clients want a trust today because they are worried about their adult child losing thousands, if not millions, of dollars of their inheritance as a result of a failed marriage. By establishing a trust as part of their will, they can help protect their child’s assets in a divorce settlement.
Let’s examine how this works. In many cases, if a child receives an inheritance and combines it with assets they own jointly with their spouse — such as a bank account, car or house — depending upon the state in which they live, the inheritance may become subject to marital property division if the adult child and spouse later divorce.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But if the child’s inheritance remains in a trust account, or they use trust funds to pay for assets only in their name, the inherited wealth can further be protected from a divorce. This gives the adult child their own assets to fall back on in the event of a divorce.
One of my clients left his daughter’s inheritance in a trust after her first divorce because he was afraid his hard-earned dollars might end up squandered if she remarried. It turns out my client was spot on — she married again, it did not work out, but her second ex-husband never got a dime from her trust.
Trusts can be complex and involve extra administrative work and costs, which may cost more compared with leaving assets outright to your children. In addition, a person or company must be named as a trustee to oversee these funds throughout the trust’s existence. But many people are willing to pay these costs to protect their child’s wealth.
How do parents decide whether to leave assets in trust for their children because of the possibility of a failed marriage? Here are three scenarios to consider:
1. Children 18 or younger.
If your child is under 18, you’re probably not thinking about the marriage/divorce angle! However, due to their youth, leaving assets in trust for them is often a good idea. A trustee will be named to oversee the child’s assets and will be able to guide them to make wise decisions with these funds. And the trustee has the power to deny any financial requests, which can be valuable if a young person is immature or easily influenced.
2. Is your child newly married?
Nearly all couples are happy in the first years of marriage, but the road can turn bumpy as life becomes more stressful and complex, whether it’s a job loss, a decline in health, financial stress or simply the demands of raising children. Instead of deciding to set up a trust right after your child’s marriage, it’s best to watch how the marriage progresses over the next five to 10 years.
3. How is the marriage going?
Even after five years or more, consider how comfortable you are with your child’s relationship and how you feel about your son- or daughter-in-law. If there is constant fighting or you simply have that bad “gut feeling,” setting up a trust for your child’s inheritance might be a wise move.
I encourage my clients to think about estate plans as five-year plans: Review wills, trusts and other documents every five years. It isn’t necessary to constantly change these documents, but reviewing them periodically helps a person to carefully evaluate relationships, finances and the emotional dynamics of their families. In addition, an estate lawyer can modify or delete the trust during your life, as your family circumstances change.
Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm with $1.4 billion in assets under management. She works with high net worth families in the areas of investment management, executive compensation, retirement transition and estate planning.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
-
How to Help Your Kids Without Ruining Your Retirement
Here are some general considerations to ensure the gift of assets to your kids will not negatively affect your financial future.
By Mario Hernandez Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
How Annuities Can Help You Retire Early and Delay Social Security
Waiting until 70 to claim Social Security benefits can pay off, so how do you bridge the gap between giving up your paycheck and filing for benefits?
By Ken Nuss Published
-
Spring Is a Good Time to Clean Up Your Finances, Too
While you’re decluttering your home for spring, consider also taking a crack at cleaning up your finances and old paperwork.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Is Your Retirement Solution Hiding in Plain Sight?
Here’s how to use your home equity in combination with an annuity contract to produce late-in-life income.
By Jerry Golden, Investment Adviser Representative Published
-
How to Choose Your Trustee or Executor of Your Will
Above all, you should choose someone you trust, keeping in mind that acting as a trustee or executor can be a complex, thankless and sometimes long-term job.
By John M. Goralka Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published