If you’re like a lot of parents whose adult children will be inheriting considerable assets when you pass away, you probably have emphasized the importance of getting a prenuptial agreement before they tie the knot to help protect those assets should their marriage end in divorce.
Even though inheritances are typically considered separate property that doesn’t have to be divided in divorce, if an inheritance becomes “commingled” with marital property, that may no longer apply. For example, if your child uses part of their inheritance to purchase a home that the couple buys and owns jointly, it’s likely to be considered commingled. Having a prenup that protects any inherited assets in a divorce can prevent that issue and protect the full value of their inheritance.
If your child and/or their spouse-to-be don’t want a prenup, you can still work to “divorce-proof” your child’s future inheritance through estate planning. There are different types of trusts that allow beneficiaries to inherit assets without making them subject to division in divorce. The key is to keep the assets out of the direct control of the beneficiary.
What is a domestic asset protection trust?
A domestic asset protection trust (DAPT) is a popular choice for those seeking to protect a beneficiary’s inheritance from third parties – including soon-to-be ex-spouses and creditors. A DAPT can also protect these assets from being taken in a judgment – for example, if your child is successfully sued.
A DAPT is an irrevocable trust that puts the assets under the control of a designated trustee. They determine how distributions are made to the beneficiary – often according to the instructions provided by the grantor who established the trust.
Legally, the beneficiary doesn’t own or have control of the assets. Therefore, they can’t be taken in a divorce or by anyone to whom they owe money. In addition to protecting a loved one’s inheritance from third parties, a DAPT can also protect the assets from being spent all at once by the beneficiary. (There are other trusts, however, that might be more appropriate if that is the concern.)
With that said, ultimately, there are a number of different types of trusts that allow people to provide for their children and other loved ones after they’re gone while protecting those assets from going to others or being misused. Determining which type of trust is best for a loved one can be a confusing endeavor. Having sound estate planning guidance can help you make the best decisions for your family.