inheritance

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.

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.

About the Author

Lisa Brown, CFP®, CIMA®

Partner and Wealth Advisor, Brightworth

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 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.

Most Popular

Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022

Recommended

Don’t Want to Leave Money to Your Kids? You’ll Probably Change Your Mind.
estate planning

Don’t Want to Leave Money to Your Kids? You’ll Probably Change Your Mind.

How much is too much to leave your children? You may be surprised.
May 26, 2022
Things You’ll Regret Keeping in a Safe Deposit Box
savings

Things You’ll Regret Keeping in a Safe Deposit Box

Locking up certain important documents and valuables in a bank vault could turn into a headache for you or your heirs.
May 18, 2022
4 Tax-Smart Ways to Share the Wealth with Kids
estate planning

4 Tax-Smart Ways to Share the Wealth with Kids

Providing for future generations shouldn’t be (overly) taxing. To manage taxes as you pass down your assets, look into UTMAs, 529s, child IRAs and tru…
May 15, 2022
6 of the Worst Assets to Inherit
inheritance

6 of the Worst Assets to Inherit

Leaving these assets to loved ones may be more trouble than it’s worth. How to avoid adding to their grief after you're gone.
May 11, 2022