Protecting Your Child’s Inheritance From Their Past, Present, and Future Divorces

People often come into our estate planning law firm and tell us they want to make sure that they set up their estate planning legal program so that their children's inheritance is protected for the children and from the child's spouse and step-children.

There are many reasons why people want to protect their children's inheritance from in-law issues. Sometimes they feel a child's spouse will spend the inheritance too quickly. Sometimes parents get aggravated when their in-laws won't let them see their grandchildren as often as they'd like. Sometimes parents feel that the children will be influenced by their spouse to give or leave the inherited assets to the child's spouse or the child's step-children.

If no extra precautions are in place, then here is what can and does happen. The moment a child receives an inheritance, the inheritance is the separate property of the child - not the community property of the child and their spouse. And if the child's spouse has influence over the child, the child may squander the inheritance. But even if the child is not influenced, note that the fruits of separate property (or rather, income produced by separate property) are community property. So if your child inherits $500,000, and that $500,000 produces interest, dividends, or rental income, then that income is community property. And if separate property and community property get so commingled that you cannot tell what is separate and what is community, then it all becomes community because of our Louisiana presumption that a thing in the possession of a spouse is presumed to be community, even though a spouse may prove that it is separate.

If the child's inheritance, either through influence or commingling, becomes community property, then your child loses half of the inheritance upon divorce.

Discussions with clients regarding this issue usually involve four parts. First, how do we ensure that our child's inheritance remains separate. Second, how do we ensure that the fruits (or income) of the child's separate property remain separate. Third, how do we keep our child's spouse from influencing our spouse into doing something stupid. And fourth, how do we ensure that when our child later dies, the remaining portion of our child's inheritance passes along to our child's children (and not our child's spouse or our child's step-children). 

One option for the parents to protect their child's inheritance is to leave the child's inheritance to the Child's Inheritance Trust. Leaving assets to a trust for your child can help prevent the commingling of inherited assets with community property. In addition, a child can sign a Declaration reserving the fruits of separate property as separate property. This can also prevent commingling of separate with community, and it will keep income separate. To be effective, the a copy of the Declaration must be provided to the spouse prior to the Declaration's filing in the conveyance records in the parish where the child owns separate real estate, and also in the conveyance records of the parish where the child is domiciled.

Part of your discussion regarding how to set this up will involve a discussion about who should be the trustee of your child's Children's Inheritance Trust. Even you are overly worried about your child's spouse having too much influence over your child, perhaps you would name someone other than your child as the trustee. 

Another area of this that parents like is that if you set up your child's trust the right way, you can ensure that when your child later passes away, any remaining trust assets would pass along for the benefit of your child's children, and not your child's spouse or your child's step-children, effectively keeping the inheritance in the blood lines.

If you want to talk to us about arranging your legal affairs the right way for your children, and you like the concepts discussed here, call us up and say you'd like to discuss establishing an estate legal program that includes the Children's Inheritance Trust. Just call 866-491-3884 to start a conversation.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450