How to Protect Your Child's Inheritance From His Spouse

How to Make Sure Your Grandchildren Get Their Inheritance

Daughter talking with Elderly mother in kitchen
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For individuals looking to bequeath their hard-earned assets to their grandchildren after they die, it is critically important to openly discuss estate planning goals with their own children, to ensure they separate their inherited assets from marital assets, in order to protect the grandkids' haul from ex-spouses, in the event of divorce. These discussions should occur before a child marries, so he or she can solidify these terms in a prenuptial agreement. Of course, in most states, inheritances made specifically to one spouse are exempt from divorce settlements--even if the inheritance occurs during the marriage.

But far too often, people muddy the issue, by commingling their newly-won assets with marital property.

Carve Out a Specific Share for Your Grandchildren

Another way to ensure future generations see their fair share of an inheritance, is by drafting a will that clearly earmarks a specific dollar amount or percentage of the estate for the grandchildren. This ensures grandchildren will directly receive a portion of your estate--regardless of what your children do with their own inheritances. Some grandparents legally require that such assets be used for specific purposes, such as college educations or a weddings.

An IRA may directly be left to grandchildren, by structuring the account as a "stretch IRA" which effectively limits grandchildren to taking only the required minimum distributions (RMDs) over their own lives. In theory, a properly-invested IRA will earn greater returns than the annual RMDs, allowing the principal to continue growing. If your grandchildren are too young to negotiate the RMDs, it may be worth establishing an IRA Inheritance Trust, that names an institutional trustee to oversee the investments and to dictate distributions.

Set Up Lifetime "Dynasty" Trusts for Your Children

When leaving someone an inheritance, it automatically becomes subject to creditors' claims, including judgment holders in lawsuits. To combat this, consider continuing the child's trust for his entire lifetime, with a properly-drafted "dynasty trust", which offers everlasting asset protection from creditors. Lifetime dynasty trusts are particularly helpful if your child is unskilled at managing money, or spends carelessly. 

The Bottom Line: Work With Your Estate Planning Attorney

If you wish to ensure that your grandchildren receive a portion of your hard-earned money, discuss your intentions with your children and put together a comprehensive legal plan, that locks in your intentions.