Divorce is stressful under any circumstances, but in an equitable division divorce state like Colorado, a parent with a substantial inheritance intended for a child may find that the inheritance becomes a serious point of contention in the divorce, especially if the other spouse is not the child’s biological parent but a step-parent.
When a court divides marital assets in a way that’s perceived as fair and equitable to both parties, assets one parent may intend to go to their child could become part of the marital pool without processes in place to protect it as a legacy intended for the child.
Keeping a child’s inheritance separate from marital assets can become complex and require an experienced Denver divorce lawyer to successfully navigate.
Consider a Prenuptial Agreement
The best protection for a child’s inheritance is taking a proactive step to protect it right from the beginning by having a Denver family attorney draft a prenuptial agreement for both parties to sign before a marriage takes place. The courts must follow this binding agreement during a divorce. Any assets intended as a child’s inheritance will not become subject to marital division during the divorce.
While a signed prenuptial agreement is the best way to protect assets and inheritance during divorce, many couples forgo the option as a sign of trust or out of a conviction that the marriage will not end. If you and your spouse didn’t sign a prenuptial agreement, there are still legal means to protect a child’s inheritance.
Creating a Trust
One of the best ways to protect assets intended for a child’s inheritance is to create a legal trust for that child. A trust that’s formed and funded by only one spouse leaves those assets in complete control of that spouse and not subject to asset division during divorce since the state doesn’t consider it marital property. The owner of the trust also appoints a trustee to manage the funds after his or her death. Because the funds in a trust are not co-mingled property, they are not divided during the divorce and can be passed directly to a child after the parent’s death.
Trusts may be revocable or irrevocable. A revocable trust allows a parent the option of reclaiming the assets, while an irrevocable trust does not. While an irrevocable trust doesn’t include the flexible options of a revocable one, it provides further protection for the assets against creditors and other claims.
For parents of adult children who wish to protect an inheritance for their child from the child’s spouse in the case of a future divorce, creating a lifetime trust for the inheritance is a sound legal option. This type of trust may have provisions for education and medical expenses as well as flexible provisions for general expenses, luxuries, and vacations. It may also allow for staggered releases of funds to go to the adult child at predetermined age milestones.
Keep Your Legacy Separate From the Marital Pool
If you’ve inherited property, heirlooms, or financial assets from your family and wish to pass them on to your children, it’s important to keep this inheritance separate from the marital community. Though the courts respect an inheritance to a spouse as separate property, a spouse may still have a claim against the other spouse’s inheritance under certain circumstances. For instance, if inherited funds were placed in a joint account and the other spouse had access to deposits and withdrawals, they can claim the account as commingled property subject to equitable division. Similarly, if an individual inherits real estate property, a spouse can claim a share of the property if they contributed funds or a substantial amount of time toward making improvements to the property.
To protect a legacy property or financial holdings for a child’s inheritance, it’s important to keep them separate during the marriage by securing funds in a separate account and using only individual funds to improve a property.