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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Parents are often concerned over how to ensure that their hard-earned money and assets stay in the family when they die. How do they keep it all out of the hands of a daughter-in-law or son-in-law, even if those marriages seem solid at the time they're planning their estates? How do they ensure that their grandchildren enjoy the fruits of their labors?

There are different ways to structure your child's inheritance so that it stays in the family for generations to come.

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 your children are comfortable, you also want to make sure that something will be left for your grandchildren.

This will hopefully encourage your child to keep his inherited assets separate from his marital assets. He can then specifically set his inherited assets aside for his children in his own estate plan. Attorneys can work with clients to keep inherited assets in their sole names so they can be left specifically to their descendants.

This is an important discussion to have before your child gets married if possible because the benefits of a prenuptial agreement cannot be overstated. Even if your child doesn't have a lot of assets of her own, she should have a prenup in place that clearly states that what she brings into the marriage as well as anything she inherits will remain her separate property.

In most states, inheritances made specifically to one spouse are exempt from division in a divorce even if they occur during the marriage. They're considered that spouse's separate property. But this typically holds true only if the spouse has taken care to keep those assets separate and not to commingle them with marital property.

Carve Out a Specific Share for Your Grandchildren

Another 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, your grandchildren will directly receive a portion of your estate regardless of what your children decide to do with their inheritances.

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.

An IRA is one type of asset can be left directly to grandchildren and can grow significantly in value over the years. An IRA can be structured as a "stretch IRA" so your grandchildren are limited to taking only the required minimum distributions (RMDs) over their own long life expectancies.

Assuming the IRA is invested to earn more than the annual RMDs, the principal should continue to grow. If your grandchildren are minors or if you're concerned that your grandchildren won't understand the benefits of taking only RMDs, consider establishing an IRA Inheritance Trust instead. You can name an institutional trustee to oversee the investments and to dictate how and when distributions are made.

Set Up Lifetime "Dynasty" Trusts for Your Children

Many people choose to leave their children's inheritance to them outright, either immediately or at a specific age such as 25, 30, or 35. But the property will be considered your child's own property when he receives his inheritance, and it 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 his entire lifetime. If the trust is drafted properly, this lifetime "dynasty trust" will create an asset protection barrier between the child and the child's creditors so the assets remain held in his lifetime trust for his benefit even if he's sued or gets divorced. 

A lifetime dynasty trust can also be a good idea if your child is not good with managing her money.

If you don't want her to spend her inheritance on shoes, jewelry, cars, and vacations, a lifetime dynasty trust can be set up to not only protect her from outside influences but from her own bad decisions as well.

A corporate trustee such as a bank or trust company is usually the best choice in these situations because a family member or friend might be swayed into giving 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, 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 one that's more than a few years old, sit down with an estate planning attorney.