When you leave assets to your children in your Will, your children inherit those assets without any strings attached and they can do whatever they want with the assets. Typically, they will have their own estate plan, and leave those assets to their own spouse and children. Usually, clients are not concerned about that type of scenario. However, in some cases, the asset being passed along is a family property, such as a vacation home or, perhaps, the parents have some concern that their child’s marriage is in trouble and the spouse may walk away with a family property as part of a divorce settlement. Another scenario is a parent with an unmarried child who wants to protect the child from fortune hunters.
In all of these situations, your money could pass out of the family to a spouse who will then re-marry and leave “your money” to their new family. Your grandchildren may never have the benefit of the money you have left for your children.
Is there a way to protect your money for your own family? The answer requires looking into divorce laws in Massachusetts. Massachusetts is unique in that in a divorce all the assets belonging to either member of the couple are available for division. The Court can divide any asset whether it is in the name of the husband or the wife, and whether or not it was owned by either person before the marriage. The Court can also divide assets which were inherited from the family of the couple. In fact, although the Court can not divide money owned by the parents who are still alive, the judge can consider the potential amount of money a person will inherit from his or her parents!
What makes the process unpredictable is that every case is different and different judges will have different decisions. You should also realize that most divorces do not result in a trial. Most of the time, the couple settles using mediators or lawyers and divide their assets themselves. Even a settlement, however, takes into consideration the fact that a judge could award one spouse the trust or inheritance of the other.
In this blog post, we will look at inherited money. We will look at money in a family trust in another blog post.
When looking at whether an inheritance could be divided in a divorce, the Court considers many factors. Was the property kept separate or incorporated into the marital assets? Did the couple rely on the money for their life style or was it mostly unused? If the money was treated as a joint marital asset, chances are the Court will divide the money as part of a divorce. If, however, the money is kept in a separate account and not used by the couple, the Court may allow the person who inherited the money to keep it.
Massachusetts is also unique in that it has a process for the Court to discover the value of a potential inheritance. The opposing spouse will ask for a “Vaughn Affidavit.” The Affidavit sets out, in general terms, the size of the parents’ estate(s) and the last time their estate plan was updated. If a person’s parents are still alive and relatively young and healthy, the parent’s money is not taken into account as an asset. If, however, the parents are very elderly and sick–the Court may take the value of the parent’s assets into consideration. The Court recognizes, however, that the parents may always change their estate plan and disinherit their divorcing child.
The suggestions below are not, by any means, a guarantee that your money will be protected in the event your child is divorced.
What Can You Do?
- Insist that your child have a pre-nuptial agreement as a condition to receiving an inheritance. Make your children aware of this requirement before they have a serious relationship, so that they understand the condition is not a reflection on their choice of spouse.
- Advise your child to keep his or her inherited money in a separate account, only in his or her name, and do not allow it to be used to support the family. Occasional, special use is less harmful than using the money regularly for support. Using the money to buy a house in joint names is not helpful. In fact, even if the house is in the name of your child alone, but the family lives in the house, it will not be protected.
- If your child dies prematurely, his or her surviving spouse is likely to marry again and use your money for the benefit of a new family. Your child should have an up-to-date estate plan with properly drafted trusts which ensures their assets will pass only to their children and cannot be used by a surviving spouse for a second family.
- Leave an inheritance to your children in a trust which we will discuss in the next blog post!
In order to protect assets, parents will often leave assets in a trust for the use of their children. In some cases, the assets in the trust are still accessible to the divorcing spouse. In many cases, however, the Court will consider the assets in the trust as part of the marital assets. If your child is the trustee of the trust, the Court considers the child to have access to all of the money and so all of the money is available to the divorcing spouse.
Even with an independent trustee, the trust should not allow payments to the child other than the sole discretion of the trustee. If the trustee can use the money to support the child, and particularly if such payments have been made to the couple, then the trust is subject to division. So, for example, many trusts require the trustees to use the trust assets for the “health, education, support and maintenance” of the beneficiary. In these cases, the Court will consider the trust to be a support trust. If the couple have been relying on the trust to pay their bills and support their lifestyle, then the Court will treat the trust as an asset which should be considered in the division of the assets.
There are many factors which are at play when considering how to divide up assets in a marriage. Length of the marriage is the most important. In a one year marriage, a Court will probably not order the division of a trust or an inheritance to a spouse. In a long term marriage, it is more likely that the couple relied on the inheritance or trust to support their lifestyle. In those cases, the Court will consider dividing that asset, or awarding the other spouse a larger share of the marital assets to make up for the face that one spouse has access to a large trust.
What Can You Do?
- To avoid fortune hunters, insist that your child have a pre-nuptial agreement as a condition to receiving any type of inheritance.
- Advise your children to keep their inherited money in a separate account, only in his or her name, and do not allow it to be used to support the family. Occasional, special use, is less harmful than using the money regularly for support. Using the money to buy a house in joint names is not helpful. In fact, even if the house is in the name of your child alone, but the family lives in the house, will not protect it.
- When setting up trusts, use an independent trustee and not your children as trustee of their own money.
- The terms of the trust should make distributions discretionary with no rights to demand money from the trust. In addition, do not include any language that requires the trustee to make payments for the “health, education, support or maintenance” of the beneficiaries.
What Happens to My Money if My Child Dies?
If it is important to you that a certain piece of property stays in the family or that your money passes only with your blood relations, you should set up a trust.
- Advise children to have an up to date estate plan which ensures their assets will pass only to their children and cannot be used by a surviving spouse for a second family.