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FAMILY FINANCE: Protecting children's inheritance

Lynn Brenner | Family Finance

May 4, 2008

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I have three children. My will and my living trust state that everything goes to them. My son recently told me that he and his wife of eight years are separating. They are not getting a divorce. Is she entitled to half of my son's inheritance when I pass away? My stocks and money were accumulated before they married. I am 80 years young, and still working. Do I remove my son's name from my will to protect his inheritance?

AB via e-mail

The simplest way to protect your son's inheritance is to leave it in trust for him. You can create the trust in your will. (You can't use your living trust for this; among other reasons, it expires when you do.)

Your daughter-in-law has no legal right to a share in your son's inheritance, regardless of when your assets were accumulated, said Eric Kramer, a Uniondale estate lawyer.

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If you leave things as they now stand, at your death your son can put his inheritance into one or more accounts in his sole name. He should never commingle it with any money that he and his wife have shared. That way, it remains his separate property. If they subsequently divorce, all she could claim is part of any increase in the value of the inheritance after he received it.

And if your son and daughter-in-law filed for divorce before your death, she'd have no claim on his eventual inheritance,

Kramer said. The assets that are divided in a divorce

are the marital assets at

the time the divorce proceeding began; assets inherited after that date aren't included.

But the easiest way to avoid any such "What if?" scenarios is to leave one-third of your estate in

trust for your son for his lifetime. He can be his

own trustee, but he must have a co-trust who is an unrelated third party.

"The co-trustee can be a friend of your son's, but not one of his siblings," Kramer said.

Your son can draw on the trust, or terminate it, as he wishes. Trust assets are protected from his creditors. Trust disbursements (or termination) will require the signatures of both trustees; but since the co-trustee is going to be a friend, that won't limit your son's access to his money. And what if your son and his friend have a falling-out? Not a problem: "The trust document can say that your son has the right at any time to remove the co-trustee and put someone else in his place," Kramer said.

I am ready to prepare my will. I am older than my wife and in so-so health. We have been married for many years and we have no children together. She has grown children from a previous marriage who have not lived with us. Our major asset is our home. I assume I will die before her. I was planning to leave everything to her. But when she dies, I would like some members of my family to get some of what is left rather than all of it going to her children. Is there a way I can arrange that?

ML via e-mail

Certainly. The answer is to leave your assets in trust for her benefit.

The trust document can specify who will be the ultimate trust beneficiaries after her death.

One caveat: You said your house is your major asset. If you own it in your sole name, you can put it into the trust. That will let you leave the house to your surviving spouse as long as she lives, and choose who will inherit it when she dies.

But you can't put the house in the trust if you and your wife own it jointly, which is the way most married couples own a house.

If your wife is the joint owner, she will automatically inherit your share of the house at your death. She will then be its sole owner, and she can dispose of it any way she wants.

Send questions to Family Finance, Business Desk, Newsday, 235 Pinelawn Rd., Melville, NY 11747-4250, or e-mail to Bfamfin@aol.com. Include your age, income and a list of major assets. Letters and e-mails can't be answered personally.