Protect Your Inheritance from Divorce

Physician's Money Digest, February 2006, Volume 13, Issue 2

Most people are unaware that a divorce cancreate a scenario where a soon-to-be ex-spousecan get their hands on the inheritedassets of the other spouse. Imagine a scenario inwhich you are married and your last living parentpasses away, leaving you with $2 million in realestate and stocks. You put the money in your maritalbank account or put the real estate in both of yournames. One year later, you and your spouse decide todivorce. (A similar scenario is if you die in the middleof obtaining a divorce.)

Importance of Trust

Depending on your state of residence, yourspouse's entitlement to your inheritance varies. Ifyou have been married for more than 10 years,chances are that your spouse is going to get half ofeverything you inherited from your last remainingparent. Protecting inherited assets during a divorcecomes from a parent's planning. If you are trying toprotect the assets you will pass to your children,the power to protect those assets is in your hands.The main way to protect your children from losinginherited assets in a divorce is through the use of anirrevocable trust.

Your parents can set up an irrevocable trust thatmoves all their assets into it when they die and namesyou as the ultimate beneficiary. The language of thetrust will allow a trustee, usually a bank or trustedfamily advisor or friend, to dip into the irrevocabletrust for many different purposes, as long as it is onyour behalf. The trust document must be written sothat if you ever get divorced, none of the assets of thetrust will go to your ex-spouse. To protect assets youintend to pass to your children from their potentialdivorce, you would also transfer assets to an irrevocabletrust at your death with the same trust languagethat would prevent any distributions to an exspousein a divorce.

Distribution Schedule

Many times a portion of the assets will be givenfrom the irrevocable trust outright to you at ascheduled age no matter if you are divorced or not.For example, there might be language to give you25% of the assets at age 60, then 65, 70, and 75.The reason behind this is that you are less likely todivorce later in life, assuming you have been marriedfor a while. The trustee would still, typically,have the ability at earlier ages to dip into the trustfor purchases of items or outright cash distributions,but those would be at the discretion of thetrustee as per the language of the trust.

While you might not think that you will getdivorced, never say never. Statistics say that morethan 50% of marriages will end in divorce. Due tomy experience with physicians, I can state withconfidence that physicians divorce more often thanthe general public on average. If your parents aregoing to pass significant wealth at their death toyou, make sure that they fund an irrevocable trustfor your benefit with language preventing distributionsto any ex-spouse.

, is president of VEBA Specialists.

Ira Kaplan, Esq, is a CPA. For a free 50-page alert on reducing

income taxes, e-mail Mr. Wallach at LanWalla@aol.com. The

information provided herein is not intended as legal, accounting,

financial, or any other type of advice for any specific individual or

other entity. Contact an appropriate professional for any such advice.

Lance Wallach CLU, ChFC, CIMC