Updated: Jan 6, 2022
Dear Mr. Premack: I have a substantial estate of several million dollars as a widowed single woman. There are three children, all adults, who I want to inherit the funds equally when I die. My big concern is that my middle son is in a rocky marriage. If I were to leave his share to him can his wife divorce him and take the money? Is there a way to protect him in case their marriage fails? – K.G.
My answer includes three parts.
Part “A”: Under both Texas and Washington law, an inheritance is received as separate property. When you die, the ⅓ share you leave to your middle son is his separate property.
Part “B”: Characterizing his inheritance is only part of the equation; how you handle it and how he handles the inheritance including how he accounts for the inheritance to protect it from a claim by his wife in a divorce are other factors in the equation.
There are several mistakes he could make after receiving the inheritance. First, he might unthinkingly put inherited funds into both spouse’s names. Banks often encourage “joint accounts with right of survivorship” because it is easy for them. Banks often do not take into consideration the estate planning goals or characterization of the money being deposited. Second, he could keep the accounts separate but inadvertently allow community property interest and dividends to build up in the same accounts. Generally, dividends and interest are community property even if the source is separate property.
This commingling of funds would give his divorcing spouse a claim against some, if not all, of the inheritance. Third, he could gift funds or value to his wife. What if he buys her a car in her name? She can claim it was a gift and is now her separate property.
Part “C”: As much as you would want to trust your middle son to protect himself, you may need to impose some legal protection. The best solution in your situation may be to leave his ⅓ to him in a Trust, with a third party (like a bank or one of your other children, being careful of the sibling situation) as Trustee/Manager. The Trust would specify exactly what benefits your son could receive and when, but he would not be considered to be the owner of the underlying inheritance.
There is a recent case decided by the Texas First District Court of Appeals (Kelly v. Kelly). In this case, Tom and Sherry were getting a divorce and had conflict over a variety of issues. One was that Tom’s parents may have set up a Trust for his inheritance, which would be sizable. He only inadvertently disclosed the Trust to the court. Ultimately, the trial court decided he should have been more forthcoming, that any funds in the Trust were community property, and that upon divorce his wife should receive 60% of the Trust fund.
Tom appealed that decision, and the appeals court reversed the trial court. The presumption that an asset is community property may be overcome with evidence to the contrary. If the asset is separate property, then the trial court may not divide it. The appeals court even determined that the Trust a) had never been seen or read by the trial court, and that b) Tom’s parents, who may have created the Trust in their Wills, were still living.
As such, if there was a Trust it did not give Tom ownership of anything – it was all contingent on his parents setting up such a Trust, then dying, then funds being transferred from those estates to that Trust. Even if those things had happened before Tom and Sherry’s divorce, the terms of the Trust in Tom’s parent’s Wills would control Tom’s interest in any principal, which would be his separate property. At worst, if the Trust gave him broad access to the principal and a cash flow, Sherry could have only claimed part of that cash flow to be community property.
A contentious divorce is difficult for all of the parties. Your goal to protect your middle son would be enhanced by using a well drafted Trust. It may not keep them from arguing over it if they divorce after you die, but it will protect the inheritance if you are careful when structuring the Trust and your middle son is careful to honor the Trust’s terms.
Paul Premack is a Certified Elder Law Attorney for Wills and Trusts, Probate, and Elder Law issues. He is licensed to practice law in Texas and Washington. To contact us, click here.
Column published on January 4, 2022.