Personal Finance | November 17, 2021

How to Protect Your Estate from an Heir’s Divorce

Estate planning is essential for those looking to pass down family wealth in an equitable, tax-efficient way. But one aspect many individuals overlook is the possibility that their assets could wind up in the hands of a child’s or grandchild’s ex-spouse.

“It might feel mean-spirited to plan for the possibility of a divorce among your beneficiaries, but the reality is that a large percentage of marriages end that way,” says George Pennock, director of trust services consulting at Charles Schwab Trust Company. “That’s why it’s critical to think about not just what you’ll pass down to your heirs but how.”

With that in mind, let’s look at ways to help ensure your assets go to—and stay with—their intended recipients.

At-risk assets

One of the easiest ways to transfer financial assets to heirs is via beneficiary designations, which bypass probate, the often lengthy and potentially expensive legal process used to settle an estate. (Transfer-on-death deeds offer similar benefits for real estate holdings.)

However, even assets solely in your child’s name may be fair game in a divorce proceeding. “If such an asset is used as collateral for a shared loan or otherwise benefits both parties, a judge may consider it when determining alimony or child support,” George says. “That’s true even if the couple lives in the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.”

Pre- and postnuptial agreements could help, but those looking to pass down assets may not feel comfortable requesting such a course of action from their heirs and their heirs’ soon-to-be or current spouses.

Another way

A carefully crafted trust can go a long way toward mitigating the risk that all or part of your assets end up in the wrong hands—particularly with estates that span multiple generations. “A lot of people focus on children, but they forget about grandchildren and whom they might marry,” George says. “A trust with the right provisions can give you greater control over who gets your assets and when.”

It’s also important to consider the state in which you originate the trust and whose laws will therefore govern it. “You can establish a trust in any state, regardless of where you reside, provided your trustee, or trust administrator, is located there,” George says.Trustee selection matters and can contribute significantly to the security and preservation of your legacy.” For example, Alaska, Nevada, South Dakota, and Tennessee allow courts to shield assets in a trust from claims that arise in divorce proceedings, including alimony and child support.

However you choose to proceed, it’s essential to think through all potential scenarios with the help of an estate planning attorney. “An attorney can help ensure your heirs’ inheritances are protected for years to come,” George says.