Parents rejoice when their children marry, and welcome their new daughters- and sons-in-law into the family, expecting they'll be a part of the family forever. But as we all know, marriages can end badly. We can't spare our children the pain of a divorce, as much as we might like to. But we can, at least, spare them the bitterness of losing part of their inheritance to an ex-spouse in a divorce. Protecting your children's inheritance from divorce may be something you should consider as part of your estate plan.
It's important to know a little something about how property is divided in divorce in order to know how to protect your child's inheritance from being divided in a divorce. Ohio is an "equitable distribution" state, which means that a court will try to fairly and equitably divide all property the couple acquired during the marriage, with specific exceptions. One of those exceptions is property inherited by one of the parties during the marriage.
If inherited property isn't subject to division in a divorce, there shouldn't be a problem, right? Well, yes and no. Inherited property is generally considered "separate," not "marital" property—but it can be converted to marital property very easily, and unintentionally, and it usually can't be converted back. This happens when separate property is commingled with marital property.
Let's say your son and daughter-in-law have a joint bank account into which they deposit their paychecks, gift money, and any other funds they receive, and from which they withdraw money for their needs. If your son inherits $100,000 and deposits it in that joint bank account, and the couple continues putting money in and taking money out of that account, those funds are commingled. In a divorce, your son would not be at liberty to say, "Well, $100,000 of the money in that account is from my inheritance, so I should get it back."
Or imagine you have a vacation cottage that you leave to your daughter. Ten years after inheriting it, she divorces your son-in-law. But in the interim, they've invested a lot of money in the property, and he's done significant work to improve its value. At least part of the increase in the value of the cottage, if not the whole property, could be considered marital property.
Your children probably are not thinking of what will happen to their inheritance in the event of their divorce. But the reality is that nearly half of marriages do end in divorce. Fortunately, there are steps you can take to remove your child's inheritance from the possibility of commingling and division in a divorce.
Trusts are an excellent option for protecting your child's inheritance in the event of a divorce, and they provide other benefits as well. Revocable trusts and irrevocable trusts offer different advantages, depending on your needs. A revocable trust, as the name implies, can be revoked, making it more flexible. The grantor (person who makes and funds the trust) controls the assets in the trust, sets the terms of distributions, and can appoint an independent successor trustee to manage the trust after their death. Because the assets are owned by the trust, assets intended to benefit your child never become marital property, so they are not subject to division in a divorce.
Irrevocable trusts, whether a domestic asset protection trust, or a third-party discretionary trust, offer similar protections, and additional benefits as well. Because the trust cannot be revoked by you, the grantor, you cannot reclaim ownership of those assets. The upside of this is that the assets are not only protected from your children's future creditors or potential divorce, but also from your own. The downside, of course, is the potential lack of flexibility, depending upon the design of the trust. Consult with an experienced estate planning and trusts attorney before selecting this option.
Under some circumstances, such as when the inheritance you seek to protect from your child's potential divorce is a family farm or other business, placing the asset in a limited liability company (LLC) may be a good choice. If this option appeals to you, be sure to work with an estate planning attorney who is familiar with the implementation of these entities for family asset protection.
Whatever choice you make, you, and hopefully your child, will rest easier knowing that your child's inheritance is protected from a possible divorce.