Keep separate property separate by keeping it separate

Dear Len & Rosie,

How do I protect my wealthy parents’ estate (who are both still living and only in their 60’s) from my slug of a step-son mooch? I don’t want him getting any money when I and my husband pass away? I am married and 43 and my husband is 49. I do not want my step-son to get a penny from my parent’s estate. How do I go about this? If you’re married and you inherit a lot of money how does this work? I would like to give it to my niece or nephew or to my own children if I ever have children.

Shauna

Dear Shauna,

The good news is that you do not appear to suffer from any codependency issues of your own, even if your husband is happily enabling his son to live irresponsibly. Even better, everything you inherit or receive as a gift from your parents or anyone else is your sole and separate property. Your husband won’t own it, so he can’t give it to his son unless you give it to him first.

If and when you inherit from your parents, you can protect your separate property by following a simple rule. “Keep separate property separate by keeping it separate.” It’s silly but true. Keep your inheritance in accounts titled solely in your name or, better yet, in a trust you create by yourself and for yourself. If you want to be even more cautious, keep your inherited funds in different financial institutions from those where you and your husband keep your community property. Many banks with online access link all of an account holder’s accounts together, so your husband could inadvertently gain access to your separate property money if the accounts are at the same bank.

It may get complicated if you pass away before your husband. Anything you leave outright to your husband will be his to do with as he pleases, and it’s very likely he’ll leave it all to his son. So if you don’t want your step-son to get it all, you have to leave your inheritance to someone other than your husband after your death, or you can leave it to your husband in a trust for his lifetime benefit.

Anything you leave to your husband outright will go to his son. A trust, however, that pays your husband income only with discretionary payments of trust principal in the event of an emergency will protect your separate property from falling into your step-son’s hands. Practically speaking, your husband should not be the trustee of such a trust, because if he’s in charge there will be nothing stopping him from giving money to his son. You can even leave your half of the community property to your husband in a trust rather than leaving it to him outright. 

You may want to talk to your parents and ask them to also make sure that their own estate plan won’t leave anything to your husband if you die before he does. They may also want to create a dynasty trust to hold your inheritance separately from anything you own with your husband.

Lastly, keep an open mind and hope for the best. People change. Given your step-son’s age, there’s a good chance he’ll grow out of it by the time he’s 30. By then you ought to know for sure whether or not you should leave him an inheritance.

Len & Rosie

So you bought your child a house.

My youngest son Nickie has had a hard time getting his life together. I recently gave him $25,000 to make a down payment on a small house because his credit was bad. I told him it would be against his inheritance. I’m leaving my estate equally to all my children and I don’t want to favor one over the other.

As it happened, I had to buy the house myself since my son’s credit is so bad. Nickie is living there, although I use it as a vacation home. He is making the mortgage payments. I intend to deed it back to him in three years, but what if something happens to me in the meantime? I want to make sure Nickie gets the house, but I don’t want to pay a lawyer to revise my will. Is there any other way it can be done?

Cloe

Dear Cloe,

Do not give Nickie the house now or even three years from now. The mortgage will remain your responsibility whether the house belongs to you or your son, and the lender could call the loan if you transfer the home entirely out of your name.

If you give him the house with a quitclaim deed and he fails to pay the mortgage, you will be stuck with the bill and the house will still belong to him. If the lender forecloses against the home if the loan falls into default, your credit will be ruined because your name is on the loan and the deed of trust recorded against the property.

A second reason not to give the house to your son is that he has shaky credit. If he has any outstanding creditors, they can put liens on the house as soon as the ink on your quitclaim deed is dry. If your son may go bankrupt, there is no point in giving him an expensive home that could be taken away from him by his creditors.

Also, if you own the home upon your death and your son inherits it from you, he will benefit from a “step-up” in cost basis that will allow him to sell the home without paying any capital gains tax. If you give him the house now, this tax break will be lost. It is better for both you and your son to keep the house in your name and leave it to him in your will or trust. When you explain the tax advantages to him, I am sure he will agree.

If he isn’t already going to inherit everything upon you death, you need to revise your estate plan to make sure he will inherit the house, but a new will, or an amendment to your revocable trust, will cost less in both money and potential aggravation than the alternatives.

As an alternative, instead of updating your estate plan you could add him to the title of the home as a joint tenant so that he can deduct the mortgage interest he pay on “your” loan from his income taxes. You wouldn’t have to update your estate plan. As a joint tenant, if you pass away first, he’ll inherit the entire property outside of probate.

Len & Rosie