Q: How do I protect gifts that I leave to my married children in the event of a divorce?
A: Many people mistakenly believe that gifts left to their married children in their estate plan will remain the property of their child in the event of the child’s divorce. Similarly, many people at the time of divorce will be surprised when their lawyer or the court tells them that their inheritance is part of their martial estate.
But, the law in New Hampshire is clear that, in the event of a divorce, all property owned by either party, however titled, can be divided by the court. In practice, this means that once your child receives a gift, the court can decide to award all or part of the gift to your child’s spouse in a divorce. Depending on the size of your child’s marital estate, an equal division of inherited assets can largely dilute the impact of the gift and your intentions for how you would like it to be utilized by your child.
A better strategy, rather than giving the gift directly to your child, would be to establish an irrevocable trust for the benefit of your child. This trust should include “spendthrift provisions”, which would keep the total amount of the trust outside of the family court’s reach for the property division. The court may still assign a portion of any income received by the beneficiary for child support or alimony. The trust preserves the principal amount of the gift, however, from being awarded to an ex-spouse. You may also leave other instructions for the trustee as to how the funds can be spent.
If a gift has already been made without the benefit of being placed in trust, a post-nuptial agreement should be considered. Like a prenuptial agreement, a post-nuptial agreement allows the parties to set property rights and expectations in the event of a divorce or the death of one of the parties. A post-nuptial agreement allows the parties to define separate and joint marital property that will be divided in a divorce. A spouse may still acquire some interest in the inherited property once received but a post-nuptial agreement could help limit this interest.
Like many planning issues, as Benjamin Franklin wrote, an ounce of prevention is worth a pound of cure. Taking action to put the proper documents in place for your children will help save stress (and legal fees) for them in the future.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.