I was working with a couple from St. Tammany Parish. They had only one child. It appeared to this couple that their child would likely get married in the next few months or years. The couple was not particularly fond of their potential daughter-in-law, but like they told me, "We don't get to select who our son marries!"
The couple had worked very hard to save up their estate. They wanted to pass it along to their son - AND THEIR SON ONLY. They feared leaving their estate to their son one day in the future, and then the daughter-in-law divorces the son and takes half of the inheritance along with her. They owned a home and another piece of property. They owned publicly traded stock, and they owned a considerable amount of cash, in the form of checking accounts, savings accounts, money market accounts, and certificates of deposit.
Here are a few things you should know if you want to keep your children's inheritance in the family and avoid losing it to your children's past, present, and future divorces.
- Inheritance is Separate Property. At the moment that a child (or anyone) inherits, that inheritance is the separate property of the person inheriting. So, if parents leave Son $1 million, then that $1 million initially is the separate property of Son's - not community property of Son and Daughter-in-Law.
- Income From Separate Property. Income produced by the separate property of a spouse is community property. So, if that $1 million that Son inherited produces $200,000 of income (interest and dividends) over a several year period, then that income that Son's separate property produced is community property owned by both Son and Daughter-in-Law.
- Commingling of Community and Separate Property. If community property and separate property get mixed up together so that you can't distinguish the separate property from the community property, then it all becomes community due to our presumption that anything a married couple has is community property.
- Declaration of Paraphernality. Son may sign a particular type of Declaration reserving that the fruits and revenues (income) of his separate property IS his separate property. Assuming he executes this document timely and accurately, then the $200,000 of income that his inheritance produced (See #2, above) would be his separate property. There would be no commingling of inheritance and income from inheritance, so the separate property status of all of it would be preserved.
- Leaving an Inheritance To Your Ex-Inlaw. Let's say your son is divorced from the mother of your son's three minor children. Your son predeceases you. It is likely that the inheritance that your son would have received would go to your son's children (your grandchildren). But guess who controls it? Yep, you've just put all of your hard earned wealth into the hands of your deceased son's ex-wife, because the courts will put her in charge of your minor grandchildren's inheritance, causing you to "roll over in your grave." Proper estate planning, done right the first time, with the right estate planning attorney, can avoid these problems.
- Leave It To "The Son Trust." For parents who want their children to have an extra layer of protection, they will set up their estate planning legal program in a manner that when the parents die, the child's inheritance will be placed into a trust for the child. Done correctly, this may prevent the child from being "influenced" by the child's spouse to do something inappropriate with the inheritance, and it may even provide that when the child later dies, any remaining inheritance in the child's trust will pass along to the child's children - and not the child's spouse or ex-spouse.