You love your children more than anything, and you've spent your life working hard to provide for them and establish a solid foundation for their future. Now that they are adults, you would think you can sit back, relax, and imagine them enjoying the fruits of your labors.
You wouldn't dream of handing over half of your children's inheritance to people who have hurt your children deeply. But that's exactly what could happen if your children divorce. Michigan is an equitable distribution state, which means that in a divorce, a court will divide assets equitably (fairly) between the parties. Equitable doesn't necessarily mean exactly equal, but it often ends up being close to equal. It is not hard to imagine a scenario in which your child receives a gift or inheritance from you and loses half of it in a bitter divorce battle.
Fortunately, you can easily take steps to avoid this outcome by updating your estate plan.
Understanding a little about Michigan divorce law will help you understand what's at stake and how to protect it. In an equitable distribution state like Michigan, courts divide marital property between the parties in a divorce.
But not all property that the parties owns is considered "marital." Some is "separate," and not subject to division. This includes property that either party owned before marriage, and property that either received by gift or inheritance.
If that were the end of the matter, this article would not be necessary. But property that is separate can become marital by commingling. This means that if formerly separate property is mixed with marital property in such a way that they are difficult or impossible to disentangle. An example would be a cash inheritance to one party placed in a joint bank account, a cash gift used to purchase a marital home, or to renovate an existing marital property. So it's essential to prevent that commingling from taking place.
One way to keep your child's inheritance separate and safe from divorce is to create a trust. Since the assets are owned by the trust, and your child is the beneficiary, the assets cannot be commingled. They are safe from the reach of a divorce court. The trust document is like a private law governing the trust, and can protect trust property not only from divorce but from lawsuits and other creditors.
One way to keep your son or daughter's inheritance separate is to create a trust. This can be less risky than bequeathing the assets directly.
The other option is to give or bequeath the assets directly to your child, but for your child to deliberately keep those assets separate, such as by putting them into an investment account in his or her sole name, or by placing those inherited assets into a trust that they can create for themselves. This is riskier than a trust you create for them, because your child could withdraw funds from the separate account for marital use and commingle them.
The reality is, about half of marriages end in divorce. Even if you don't think it will happen to your child, it's wise to prepare for the possibility. If you would like to learn more about protecting assets for yourself and for your children and grandchildren, we invite you to contact us to schedule a consultation.