Is Your Child's Inheritance Actually Protected?

When parents think about leaving money to their kids, they usually feel good about it. They've worked hard, saved diligently, and put together an estate plan. But one of the most common gaps I see, even with clients who have done the "right things,” is that the money they're planning to leave is not protected how they imagined it would be.

Here are a few scenarios worth thinking through. 

Outright Distributions 

Most estate plans are set up to distribute assets to children either all at once or on a graduated schedule, for example, one-third at age 30, one-third at 35, and the remainder at 40. This sounds thoughtful, but there's a catch. If the second parent dies when the youngest child is already 40, they've blown past all those graduation points and receive everything outright, in one lump sum, with no guardrails. 

That child may go through a divorce then or in the future, and a portion of the inheritance could be subject to a settlement. Or they may be a physician or business owner facing a lawsuit or liability claim. In those cases, the inheritance could be subject to creditor claims.

One approach is to consider a discretionary lifetime trust for each child. The assets stay protected from creditors, divorcing spouses, and lawsuits, while still being fully accessible to your child for their own needs. It's one of the most underutilized tools in estate planning. 

The Blended Family Problem 

If you have children from a prior marriage, or your spouse does, things can get complicated. The default way most joint accounts are titled means that when one spouse passes, everything flows to the surviving spouse, who can then do whatever they wish with it. That may feel fine today, but circumstances change. 

If your estate plan doesn't specifically direct assets toward your own children, there's a real chance the money won't get there. An attorney can draft language that protects your children's inheritance regardless of what happens after you're gone. 

What to Ask Your Attorney 

The next time you review your estate plan, it's worth asking: "If my child were going through a divorce, could their inheritance be at risk?" If the answer is yes, or even "I'm not sure,” that's worth addressing. 

Happy Planning,

Alex 

This blog post is not advice. Please read disclaimers.