How to Protect Your Child's Inheritance From Spouse

How to Make Sure Your Grandchildren Get an Inheritance

Daughter talking with Elderly mother in kitchen
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One common question that clients ask their estate planning attorney is how to ensure that their hard-earned money stays in the family and, more particularly, out of the hands of a daughter-in-law or son-in-law. The good news is that there are different ways to structure your child's inheritance so that it stays in the family for generations to come. Here's how.

Talk to Your Children About Your Intentions

One way to protect your grandchildren is to openly discuss your estate planning goals with your children.

Make it clear that while you want to make sure that your children are comfortable, you also want to make sure that there will be something left for your grandchildren. This will encourage your child to keep inherited assets separate from marital assets which the child can then specifically set aside for their children in their own estate plan. As an estate planning attorney, I worked with many clients who kept inherited assets in their sole name which were then specifically left to their descendants instead of their spouse.

Also, note that an important discussion to have before your child gets married is the benefits of a prenuptial agreement. Even if the child doesn't have a lot of assets of their own, if the child will inherit significant assets from a parent or other family member, then the child should have a prenuptial agreement which clearly states that what the child brings into the marriage as well as inherits during the marriage will remain the child's separate property.

Carve Out a Specific Share for Your Grandchildren

One way to ensure that future generations receive an inheritance is to set aside a specific dollar amount or percentage of your estate for your grandchildren. That way, regardless of what your children decide to do with their inheritance, your grandchildren will directly receive a portion of your estate.

Some grandparents even choose to set aside assets for their grandchildren that must be used for a specific purpose, such as education or a wedding.

Note that there is one type of asset that can be left directly to grandchildren that can grow significantly in value: an IRA. This is because an IRA can be structured as a "stretch IRA," meaning that the grandchildren can be limited to taking only the required minimum distributions (RMDs) over their own long life expectancies. Thus, assuming the IRA is invested to earn more than the small payout of the annual RMDs, then the principal of the IRA will continue to grow. If your grandchildren are minors or if you're concerned that your grandchildren won't know how to invest the IRA or understand the benefits of taking only RMDs, which will undo the "stretch" of the stretch IRA, then you should establish an IRA Inheritance Trust in which you can name an institutional Trustee to oversee the investment of the IRA and dictate how and when distributions will be made to your grandchildren.

Set Up Lifetime "Dynasty" Trusts for Your Children

Many people choose to leave their children's inheritance outright to them, either immediately or at a specific age, such as 25, 30, or 35.

But once your child receives their inheritance outright, the property will be considered your child's own property and will automatically become subject to creditors' claims, including judgment holders in lawsuits and a spouse during a divorce.

Instead, consider continuing the child's trust for the child's entire lifetime. If the trust is drafted properly, then this lifetime "dynasty trust" will create an asset protection barrier between the child and the child's creditors so that if the child is sued or gets divorced, then the assets held in the child's lifetime trust will remain in the trust for the child's benefit and kept out the pockets of the creditor or ex-spouse.

A lifetime dynasty trust will also be important if your child is not good with managing their own money or you're concerned that your child will spend their inheritance on shoes, jewelry, cars, and vacations.

In these cases, the lifetime dynasty trust can be set up to not only protect the child from outside influences, but also from the child's s own bad decisions or excessive spending habits. A corporate Trustee, such as a bank or trust company, will be the best choice in these situations since a family member or friend may give in to the child's requests.

The Bottom Line: Work With Your Estate Planning Attorney

If you want to ensure that your grandchildren receive a portion of your hard earned money, then discuss your intentions with your children and put together a plan that will guarantee that your wishes will be fulfilled. If you don't have an estate plan, or if you have an estate plan but it's more than a few years old, then sit down with an estate planning attorney. If you have one to work with, great, but if not, here are some tips to help you find the right one: