If you have children, you’re probably planning on leaving your estate to them when you and your spouse pass away. Establishing a living trust is usually the best way to set up your estate plan, because it can eliminate probate and save your family a lot of time and money.
But establishing a basic living trust won’t protect your children’s inheritance from divorce claims and lawsuits. With most living trusts, mom and dad’s assets are distributed directly to the children when the children reach a certain age. The problem is those assets can be taken by a divorcing spouse or a plaintiff in a lawsuit.
Without knowing, Kathy took what was her separate property (in California an inheritance is separate property) and converted it to community property when she made the deposit.
Mom and dad pass away and their living trust instructs the trustee to liquidate and distribute the assets equally to their children, Kathy and Bob. Each child receives a check for $300,000. Kathy deposits her check in her bank account, which happens to be a joint account with her husband. Without knowing, Kathy took what was her separate property (in California an inheritance is separate property) and converted it to community property when she made the deposit. A few years later, Kathy’s husband files for divorce and makes a claim for half the inheritance.
Bob deposited his check in his bank account and on the way home from the bank, he rear-ended someone who suffered severe injuries. The injured driver sued Bob and won a judgment for more than Bob’s auto insurance limits. Bob’s personal assets, including the inheritance, must be used to satisfy the judgment.
In both of these scenarios, the inheritance would have been protected and mostly off limits to a divorcing spouse or plaintiff if mom and dad had included what we call “Lifetime Protection Trust” provisions in their living trust.