As a parent, you dream of the day your little ones fly the nest and lead happy, fulfilling, productive lives of their own. (This is what probably keeps you going at the end of the never-ending days of homework, band practice, sports activities, and other miscellaneous parental torture devices. Or is that just me?)
But the worries that accompany parenthood in the early years don’t leave the nest with your children. Parents worry about their children’s happiness long after they’re gone. (They do leave eventually, right?) Are they safe? Have they chosen the right partner? Why have they chosen their friend’s garage band to perform at their wedding? What if they get divorced?
Divorce is a four-letter word to many parents, especially when it comes to inheritances. Parents creating estate plans often fear that assets passed down to their children will end up in the hands of their child’s future ex-spouse. And as parents, you didn’t work so hard to provide a better future to the your children’s ex-husbands or ex-wives. So how can a concerned parent avoid handing half their legacy to their children’s spouse?
First, a quick primer. California is a community property state. This means that all income and assets accumulated after the date of marriage are considered property of the ‘community’, e.g. the two spouses. But inheritances are considered separate property of the spouse that inherits.
So what does this mean? When you die, your children will inherit your estate as their separate property. If these assets are kept solely in the name of your child and not co-mingled with salaries or other community property assets, then they are not considered community property in the case of a divorce. Basically, the inheritance is only your child’s and no one else has a claim to it.
But let’s be real. Most often, your child will get their inheritance and place the money in a joint account with their spouse and use it for common expenses like kids, mortgages, vacations, and kids. Did I mention they may use the inheritance on their kids’ expenses? These actions then change the nature of inheritance from separate property to community property.
So what’s a concerned parent to do? First and foremost, discuss your concerns with your estate planning attorney. Depending on the level of complexity and size of your estate, there are advanced planning options available to you to keep assets out of the hands of your child’s future ex-spouse. Most solutions include keeping the inheritance out of the direct control of your child as well.
But for the vast majority of families, it is not practical to create a complex estate plan with on-going maintenance requirements and significant lack of control of assets for your children for estates worth less than $25M. Our advice is to talk to your children, encourage them to consult with attorneys before they get married, and educate them about money and the law. Too often we consider legal services as a ‘one and done’ type of service. You should develop a good relationship with your estate planning attorney and encourage your children to do the same.
Keeping this key information in mind can help your estate planning attorney to create the most effective estate plan for you and your family. Because divorce is a four letter word but the harshest three words when it comes to your estate are ‘I didn’t know.’
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