Leaving Money To Adult Children: Planning For Contingencies
A few months ago, we wrote about how life events like marriage or divorce can provide a nudge for you to review your estate plan - or create one for the first time if you don't have one.
For example, suppose you are getting married and already have a will or a trust set up. As we noted in our March 13 post, this may prompt you to revise your designated beneficiary or make other appropriate changes.
In this post, let's consider a somewhat different scenario: the possible divorce of an adult child to whom you intend to leave much of your estate.
If your adult child’s marriage is on the rocks, it is reasonable to ask how that should affect decisions about your estate plan. In particular, you may want to consider the timing of any substantial gifs you make to your child.
If you give a large gift to your child during his or her marriage and he or she uses it to buy a house with their spouse, the gift would probably be considered to be “commingled” with marital funds. The same reasoning would apply to money from an inheritance.
What this means, in practice, is that if the marriage ends in divorce, both parties would likely be entitled to an equitable share of funds from the gift or inheritance. This would be the case even though the original gift or inheritance itself was the property of one spouse, not the other.
It would likely be a quite different scenario, however, if a spouse received a gift or inheritance from his or her parents and did not commingle the funds. In that event, the property would likely be considered separate property in the event of divorce.
In order to provide more certainty to the wealth distribution process, however, it may be worth creating a trust to transfer money to your adult children.
Source: Star-Ledger, "Your Money" Protecting adult child's inheritance from ugly divorce fight and poor money decisions," Karin Price Mueller, May 12, 2014