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Divorcing Children and Asset Protection

The statistics are startling… 40% or more of all first marriages today end in divorce. The figures for second and third marriages are even higher.

For parents, it is difficult to watch children or grandchildren go through a failed marriage. But even worse might be the knowledge that money you left for their inheritance ends up in the hands of an ex-son or daughter-in-law.

The good news is that you can take steps today to protect the assets passing to family members from divorcing spouses and other potential creditors as well.

Signs that you might want to engage in planning to protect an inheritance include a spouse who:

  • Spends every dollar that comes in the door
  • Has a hard time getting or holding a job
  • Gambles compulsively
  • Has a drug or alcohol problem
  • Is mentally abusive to his or her spouse

No doubt there are other indications that this type of planning might be appropriate. You will need to be the judge. Clients sometimes say that they are not worried about their children. All is going well and no problems are expected. Just remember that people change and may act differently under pressure. It may be prudent to provide for protection of the assets even if everything seems to be going well today.

For most, the best protection will consist of setting up trusts for your children and grandchildren with terms that will serve to protect the inherited assets as much as the law allows.

While each situation is different, it is usual to see terms in a trust that will give the trustees of the trust the power to make distributions to your heirs. Sometimes the power to distribute is wholly discretionary. Other times, the trustees may have more limited powers. These limited powers are known as ascertainable standards. These standards serve to guide your trustees as they make distributions to your children or grandchildren for health, education, and maintenance.

The fact that only the trustees have the power to make distributions is what creates the asset protection for your heirs.

The key is to make sure that the trustees you choose are people or institutions who can be relied on for their trustworthiness and good judgment.

Clients often ask if their children can be trustees of such trusts. In most cases it is possible to name a child or grandchild as trustee of their own trust. In such event, you will want to be sure to name a co-trustee for distributions.

You can also create an escape hatch allowing a child to be trustee unless they are going through a divorce, in which case they would automatically be removed from that role. In such cases, you may give a child the power to name a successor trustee. Or you may want to choose the successor trustees, in which case, you can include them in the trust document. After the divorce is finalized, a child could resume their role as trustee.

Thought should be given here though as many divorce judgments are subject to modification. In such a case, it would not be wise to have a child serving as trustee.

Choices of an independent trustee can include bank trust departments, professionals (CPAs and attorneys) or even close friends and relatives. The key is to have someone with financial experience and someone with the backbone to uphold the terms of the trust. Given the level of financial fraud in the news of late, it always makes sense to consider naming at least two trustees so that there is a check and balance on the power of any one individual.

If you have questions, call our office to set up a time to discuss this with you.

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