Protecting Your Children's Inheritance When You are Divorced

In the wake of a divorce many people’s most valuable assets are their retirements plan and their life insurance policies. Obviously, it is a good idea to update the beneficiary designations on these assets to ensure that the ex-spouse is not named as a beneficiary. However, in some circumstances this may not be enough to ensure that the ex-spouse has no ability to access the funds. Let me explain.

Imagine for a moment a woman who recently finalized her divorce and updated her beneficiary designations on her retirement and life insurance. She names her two minor children (children who are also of her ex-spouse) as the beneficiaries. Tragically, she passes away just a year after the finalization of the divorce while her children are still minors. The retirement plan and the insurance may only be paid out to an adult and these companies will be looking to the “guardian” of the children who will presumptively be the ex-spouse as the father of those children.

Unfortunately, the above scenario is all too often not simply hypothetical. Naming a beneficiary is necessary for assets like retirement plans or insurance policies, but often is not enough to fully protect loved ones in complex family situations. Luckily, there are options available to provide the requisite protection.

Trust Planning

Trusts allow you to coordinate and control your estate with unparalleled flexibility. For those unfamiliar with the idea of a trust, it is a legal arrangement for managing your property while you are alive and passing it to your beneficiaries after you die. A trust involves several key players, the Trustor, Grantor, or Settlor (this is the individual establishing the trust); the Trustee (this is who manages the assets and could be you or someone you trust); and the Beneficiaries (these are people who receive the benefits of the trust after you pass away).

How Trusts Provide Protection Post Divorce

A trust protects your children’s inheritance in several important ways:

  1. You select the Trustee, this means you can ensure that your children’s assets are managed by someone you trust, someone that cannot be influenced by your ex-spouse.
  2. You choose the beneficiaries. However, you may also provide requirements or guidance on how the assets in the trust are utilized for these beneficiaries. This means you can keep funds set aside for long-term goals you may have for your beneficiaries such as college, purchasing a first home, or starting a business.
  3. A fully funded trust avoids probate. This saves your beneficiaries time, effort, and cost that then becomes an additional part of their inheritance. This increases the legacy you are able to leave for your loved ones and less money unnecessarily foes to lawyers and courts.

If you are divorced it is especially important to consider the risks involved with estate planning. A trust is a great tool to ensure your plan works precisely the way you want, but you will need to talk with an estate planning professional to discuss your unique circumstances.

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