It is common for parents to make gifts of assets to their children. Mom and Dad often make cash gifts while they are living or leave their assets to their children when both spouses have passed. Sometimes, substantial gifts or distributions are made to children such as stock in family-owned businesses. Can those assets be protected if the child did not enter into a prenuptial agreement with his or her spouse? They sure can, but careful planning is required.
Non-marital vs. Marital
A child’s assets can be protected in divorce if an agreement exists or the assets to be protected are “non-marital.” Since most couples do not enter into pre or post marital agreements, parents should be careful how they give assets to their children. They should do so in a manner that preserves the non-marital nature of the assets and maximizes protection from an in-law’s marital claims.
Gifts made to a child are non-marital and most often protected from divorce claims so long as the recipient does not commingle the property with his or her spouse. Parents should work closely with the child and make sure the gifted assets are not placed into an account with marital assets and that the child does not cause the assets to lose their protected status.
An inheritance received by a married child is usually non-marital property so long as it is not commingled. Again, care must be taken to give the child assets in a manner that preserves the protection afforded by the non-marital status. Parents often like to give assets to children outright and free of trust restrictions. They fear their child will need inherited money for important life matters and a trust will impede free access . Trusts can be drafted to give appropriate access and also provide marital asset protection at the same time.
The “Back Door Prenuptial Agreement”
A somewhat simple solution for parents is to give an inheritance in the form of a “back door prenuptial.” That is where a child’s inheritance is placed inside of a trust such as in one of the following manners:
- The child’s trust is generation-skipping, which gives the child access to trust assets for “health, education, maintenance and support,” but never gives the child outright access. Instead, the trust assets remaining at the child’s death goes to his or her descendants.
- The child’s trust is not generation-skipping, but rather states the child may (not mandatory) withdraw all of the trust funds in stages or at a given age. By leaving the assets in the trust beyond the prescribed age or ages, the child enhances the chances of preserving the non-marital status of the assets. The assets remain in a segregated trust account and, as such, the risk of commingling assets is mitigated.
In both cases, the trust for the child serves to preserve the non-marital nature of the assets and does what a “prenuptial agreement” is designed to do – save assets from divorce claims. However, the child never asked his or her spouse to sign an agreement – a “back-door prenuptial”!
Most couples desire to help their children, but are reluctant to ask them to enter into a prenuptial agreement with their fiancé. A little planning can help parents preserve family assets!
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.