Dear Len & Rosie,
We have three grown children with children of their own and we have a trust. We want our children to be the beneficiaries but want to set it up so that, should they divorce, the spouse would not have a right to the inheritance. I know that an inheritance comes into the marriage as separate property but I thought that, if the pool is used for community expenses, mortgage, etc. that the whole thing could become community property. Yuk. Is there a way to ensure that it will stay separate property? We don't mind if our children purposely use the funds for their families, but would like to set it up so that they can keep the remainder of the inheritance should they divorce. What should we be looking for?
Most parents think the way you do. They don't want to look down from above and see their ex-son-in-law driving a Lexus bought and paid for with their daughter's inheritance. Normally, you do not have to worry about your childrens' spouses inheriting anything from you. They will get nothing upon your deaths, unless you specifically say so in your wills or trust. What you have to worry about is what happens to the inheritance once it's in the hands of your children.
An inheritance is separate property, but many children, either by mistake or on purpose, commingle their inheritance with community property assets, or even transmute their inheritance to community property. There are a couple of options available to you to help your children not do this.
The first is education. The trick to keeping separate property separate is to keep it separate. While that may not make much sense, it can be pretty simple. Your children should know to put any inherited assets into brand new accounts in their names alone, preferably at different financial institutions. Then, they need to know that they should never put anything else into these accounts that may be community property. If your children create trusts to avoid probate, these accounts should be identified as being their sole and separate property.
But some children just won't listen to their parents. They'll listen to their spouses instead when late at night they hear "Honey, if you love me you'll put your inheritance in both of our names." If you are worried about that happening, there's a better alternative than trusting your children to look out for their own interests. You can leave them their inherited assets within dynasty trusts. Depending on the circumstances, you can make each child the trustee of his or her own dynasty trust. Each trust will make payments to your children for their support and education. The trustee won't be able to transmute the inheritance to community property. If there's a divorce, your son-in-law won't walk away with your money.
There are other benefits to dynasty trusts, including protection from the creditors of your children, and estate tax avoidance on the deaths of your children. And you can also put restrictions on the ability of your children to give away the family legacy when they die. You can make them leave it all to their children when they die, allowing you to keep your accumulated wealth in your family for generations to come.
Len & Rosie