I am a big proponent of including in your living trust provisions to establish separate lifetime proteciton trusts for each of your children. Lifetime protection trusts are the alternative to an outright distribution. With an outright distribution, you child will receive his or her inheritance, literally outright – like a check written to him or her. The inheritance is then in the child’s name and exposed and up for grabs by a divorcing spouse or a plaintiff’s lawsuit.
If you include lifetime protectiont trusts in your living trusts, then when you pass away, the inheritance you leave your children (whether it be real property, bank or investment accounts or life insurance) will be distributed to a separate trust for each of your children. When your child is a certain age that you choose (say 25 or 30), he or she can become trustee of his or her own trust.
If the inheritance remains in the lifetime protection trust, it will be more difficult for your child to accidently transmute the assets from separate property to community property. Consequently, the assets can remain largely off limits to a divorcing spouse.
And if your child is sued, the plaintiff will have a difficult time reaching your child’s inheritance, because the inheritance assets are not owned outright by your child. Instead, the assets are owned by the trust, which your child controls.
For just a little more effort, you can design your estate plan to include significant divorce and lawsuit protection for your children.