The divorce rate in the United States is currently about 50% of all marriages. Most parents do not want to see their estate assets go to a child’s divorced in-law in a marital property division even though they usually want their child, and their grandchildren, to benefit from their estate. What should parents do to take into consideration the possibility or probability of a child’s divorce?
The answer requires a general explanation of Massachusetts family law and how a probate court divides marital assets. Although some states specifically exclude inherited assets from a marital estate, assets inherited in Massachusetts before or during a divorce may be included as marital property under a principle called “equitable division.” Factors include use of the assets during the marriage, co-mingling with other marital assets, need, immediacy of receipt, and other considerations. Even the potential for an inheritance or a remainder interest in a trust could affect the outcome of the division of already existing marital property under a principle called “expectancy.” Child support is an additional factor.
Therefore, it is an important that when parents are doing asset protection planning for themselves by transferring property to their children during their own lifetimes, they take this into consideration and not leave their gifted assets under the direct individual ownership of a child if there is any chance of divorce. Additionally, many parents who transfer property to children expect that if there is ever a need for the child to voluntarily support them with the property in return, then it will be available to do so, and not be lost or encumbered in a divorce.
A primary technique for avoiding this direct control risk is to put the property in trust with an independent trustee, and only name the at-risk child as a beneficiary upon some future contingency, such as the death of the surviving parent. An independent trustee could be a professional such as a bank or attorney, or it could be a dependable family member such as another child. If grandchildren are named as beneficiaries, the independent trustee is often an aunt or uncle, but not the grandchildren’s at-risk parent.
While this will not totally remove the possibility that a probate court could still use the child’s share of the trust property in calculating the current division of joint marital property already within the control of the child, it will eliminate direct loss of the assets to the spouse. As an additional protection, drafters of trusts sometimes include authority for an independent third party to temporarily or permanently remove a child beneficiary from a trust if a divorce is pending.
A trust can also continue to keep property safe following the death of the parents if the child has ongoing liabilities. The decision for distributions could remain totally within the discretion of an independent trustee, whereas the trustee would keep track of the financial stability of the child before making a distribution. However, while the principal in a third-party discretionary trust cannot be directly attached by the divorcing spouse, any distributions from the trust for the benefit of the child could be fair game for the divorcing spouse to attempt to attach.
There is no one plan that works well for every situation. There is considerable latitude in how courts can treat the child’s share in dividing marital property, even when only potential inheritances and inaccessible assets are involved. It is also recommended that if a divorce is contemplated or pending, the estate planning attorney coordinate the plan with the child’s divorce attorney to help determine which plan will best protect the assets, and yet eventually provide for the child or grandchildren according to the wishes of the parents.