Protecting Your Children’s Inheritance from Divorce with Proper Life and Estate Planning

Occasionally, we will have clients contact us who mention that they are interested in setting up their legal affairs with a trust that provides for inheritance to pass directly to their children. However, and occasionally, our clients will tell us that their children are mature and responsible when it comes to their own lives and financial affairs. Although, the clients will occasionally mention to us that they are worried about the spouse of one of their children. Occasionally, our clients will tell us that they don’t believe anything will happen in the future, however, they are fearful that their children will lose their inheritance as the result of a divorce. 

When we learn of these concerns from our clients during an initial client meeting, we mention that there are a variety of estate planning strategies that we can put in place to protect the children’s inheritance and provide the peace of mind that our clients are seeking. In addition to tax planning, probate avoidance, and/or Medicaid planning trusts, we may also recommend in these scenarios an Asset Protection Trust to protect their children’s inheritance. 

An Asset Protection Trust would allow the family to set up a trust, funded with their assets that would eventually go to their children as his or her inheritance, and would provide those assets with protection from creditors and even a spouse through a pending divorce. If the children’s inheritance were funded into an Asset Protection Trust, even if that child gets divorced in the future, then that child’s inheritance would be protected from any claim by that former spouse. 

However, this is an emerging area of the law that is changing with the passage of this law by the Tennessee legislature in 2007. For instance, in order to shield these assets from the creditors and/or former spouse of your child the trust would need to be (1) irrevocable, (2) the trustee must be a Tennessee resident, (3) the Trustee must participate in the administration of this trust, and (4) the person who set up the trust (the settlor) cannot be the same person who serves as trustee, i.e., the parents who set up this trust to protect their children’s inheritance cannot serve as the trustee. 

Although this trust is more complex and requires more work in order to set up and administer, the asset protection benefits and potential long term costs and consequences that these trusts provide substantially outweigh the costs and fees involved when you initially establish one of these asset protection trusts.

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