Divorce impacts not only your own financial stability, but that of your children as well. Ensuring that your children’s inheritances are protected from any divorce they might go through as adults will provide a sense of security for all involved.
Property Owned Before Marriage
If your child marries, the assets they and their spouse each bring to the marriage are considered separate property and are not divided if they divorce. This is true unless those assets are converted to marital property during the marriage. There are two ways this can happen:
- Change in the title. If your child puts their spouse’s name on a deed, title, or another ownership document, this changes a separate asset to a marital asset. For example, if your child has an account worth $1 million at the time of marriage, that account is separate property. However, if they add their spouse’s name to that account, it is converted to marital property. It then must be divided if the couple subsequently divorces, even though the money was your chicld’s when they entered the marriage. This is true for any asset, including real estate, financial accounts, art, businesses, and more.
- Improvement or contribution to the property. Another way an asset can be converted to marital property is if your child’s spouse does anything during marriage to maintain or increase the value of the asset that is your child’s separate property. The most common example of this is real estate. If your child owns a home prior to marriage and then during the marriage marital funds (or their spouse’s separate funds) are used to do repairs, maintenance, or improvements or to pay a mortgage or loan on the property, a portion of the increase in value from the date of marriage becomes marital property. Another common situation is a business that your child owns prior to marriage.
If their spouse helps with the business (not as a formal employee), their input contributes to its increase in value. The resources and actions the child’s spouse contribute make that increase in value part of the marital property. The entire asset itself is not marital property—just the increase in value that accrued from the date of marriage. It does not matter if the asset continues to be held just in your child’s name.
Inheritance During Marriage
Inheritances that your children receive while they are married are also considered to be separate property should the couple divorce. However, this is true only if the inherited property is kept separate. If your child’s spouse is added to the title, then the asset is converted to marital property and can be divided in a future divorce. A common way this happens is a child inherits cash which is transferred to them from the estate. They then deposit those funds in a joint account with their spouse. The funds automatically become a marital asset in this situation.
If your child contributes to the upkeep or improvement of an asset or assists in paying off debt associated with the asset, a portion of the value that accrues during the marriage is a marital asset. While real estate is the most common example, this could also apply to assets such as art. If a painting is inherited and then marital funds are used to clean, restore, or reframe the painting, a portion of its value becomes a marital asset subject to divorce.
Even if you bequeath an asset just to your child either before or after marriage with the intention that it be their separate property, your child can convert it to marital property and potentially lose all or part of it should they divorce. Because of this, you may want to consider options that will protect inheritances from your children’s possible divorces.
- Talk to your adult children. The most important first step is to help your adult children understand how property is divided during a divorce and how separate property can be converted to marital property. Make sure they have an awareness of the pitfalls and mistakes that can be made.
- Insist on prenuptial agreements. When your children marry, insist that they execute a valid prenuptial agreement prior to the wedding. This document will clearly demarcate what is separate property and what is marital property and can protect their inheritances from division in a divorce.
- Consider a trust. Instead of bequeathing assets through your will upon your death, talk with your legal team about creating trusts. Trusts allow your children to use and enjoy the assets you place in the trust, but ownership and title are held by the trust and cannot be impacted by a divorce. Trusts can provide ironclad protection from asset division in a divorce. However, your child must understand that any assets transferred to them from a trust can become subject to division in divorce if they are converted to marital property.
Careful planning to circumvent the effects of future divorces will ensure that your children’s inheritances are protected and accessible to them throughout their lifetimes.