Protect Your Children's Inheritance from Divorce

When you design your living trust, you will have two options for how you want your children to receive their inheritance.

Option 1. Outright Distribution. An outright distribution is a simple distribution to your child. For example, if your assets are liquidated, your trustee would write a check to your child. This is the simplest distribution method, but it leaves your child's inheritance unprotected from divorce claims and lawsuits.

Let's say your daughter is married and lives in California. By default, almost all of her assets are community property. However, the one big exception is an inheritance. An inheritance is separate property.

If your daughter receives an inheritance check, it is separate property. But if she deposits her inheritance check into her bank account which is jointly owned with her husband, she unknowingly will have converted the separate property into community property. If they divorce, her husband could claim that half of the inheritance is his.

Option 2. Asset Protection Trusts. Asset protection trusts are sub-trusts, or trusts within your living trust, that are created when you pass away. Instead of your trustee writing a check to your daughter, he would write a check to the trustee of your daughter's inheritance trust. The trustee of her inheritance trust would have control of how to invest the inheritance and when to make distributions to your daughter. When you daughter is old enough, she could be her own trustee.

By including asset protection trusts in your living trust, your children's inheritance will not accidentally become community property, and the inheritance will be significantly protected from lawsuits.