Protecting Your Inheritance from Your Spouse
It’s no surprise that divorce rates spiked over the past two years. Being stuck at home with a spouse made many people reevaluate their relationships. Throw in the stress of raising children, financial uncertainty and the staggering number of deaths, and it is a wonder that even more people did not get divorced. The pandemic showed us that life is short, and many people have decided to move on and make the most of their lives.
If you are evaluating whether or not to stay in your marriage, consider what you can do to protect your inheritance while you are deliberating.
First, consider having your family members keep assets in trust for you. Many parents will leave assets to their adult children outright when they die. That may seem like a good idea to you as it gives you 100% control over those assets, but that control comes at a price. You may end up giving your spouse half of the assets in a divorce.
Speak to your parents and reconsider receiving your inheritance outright if you are thinking about divorce. If your parents die and you receive the assets outright, the assets will most likely be considered marital property subject to division upon divorce (unless you have a prenuptial agreement).
Perhaps a safer option is to keep the assets in trust. You will be the beneficiary of the trust, but the trustee will control the distributions to you. You should have no right to receive the assets. If you can receive the assets, the court can determine that they are yours even if you do not take them from the trust.
Also, if the trust gives you an income stream, the principal may be protected, but the income stream could be used to determine how much alimony you will receive – or worse, that you will need to pay.
For maximum protection, you will want an independent trustee (such as a bank or trust company) to manage and distribute the assets to you. You will be giving up control, but in return you have greater protection.
Second, create your own estate plan. You do not want any assets that you might already have received or that you may receive in the future to go to your spouse. Some people think they need to create an estate plan with their spouse. Not true. You can go to an attorney on your own and create your own will and trust – just don't go to the attorney who drafted your current estate plan as that attorney has a duty to both you and your spouse and will not be able to represent only you.
You don't have to leave any assets to your spouse, but know that in most states he will be entitled to receive a portion of your assets by law. Some people mitigate this by leaving the spouse exactly what he would receive by law – no more and no less. If you are thinking about disinheriting him completely, consider whether he would contest the will. If you have children together, is he someone who would contest the will even if it meant taking money from his own children?
You should remove your spouse as executor and trustee and name a close friend or family member instead. You can also name a guardian for your minor children (although keep in mind that as the children’s parent, your spouse is the guardian unless he is proven to be unfit).
Do not forget to update your health care proxy and your power of attorney to remove and replace your spouse to make important financial and health care decisions for you if you are unable to make them for yourself.
Finally, consider a postnuptial agreement. While a postnuptial agreement does not carry as much weight as a prenuptial agreement, it can still offer you protection in the event of divorce. You may also negotiate more favorable terms. After all, you will be negotiating the terms of a possible divorce while you are trying to make an effort to stay together. The resulting terms may be more amicable than if you have to negotiate the terms in the middle of a bitter divorce. As part of the terms, you should include that your inheritance will be your separate property and if you divorce you take your separate property with you.
One downside to a postnuptial agreement is that in some states you will need to disclose your potential inheritance. If you stand to inherit $20 million one day and your spouse doesn't know this, you may not want to disclose that information. It may be the only reason he stays in the marriage, or he may use it against you in negotiating divorce terms if you file for divorce.
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