Protecting Your Children’s Inheritance When You are Divorced
Consider this story. Beth’s divorce from her husband was recently finalized. Her most valuable
assets are her retirement plan at work and her life insurance policy. She updated the beneficiary
designations on both to be her two minor children. She did not
want her ex-husband to receive the money.
Beth passes away one year after her divorce. Her children are still minors, so the retirement
plan and insurance company require an adult to be appointed to receive the inheritance Beth
left behind. Who does the court presumptively look to serve as the caretaker of this money?
Beth’s ex-husband who is now the only living parent of the children. (In some states, this
caretaker of the money is called a guardian, whereas in others it is the conservator. The title
does not matter as much as the role, which is to manage the funds on behalf of a minor, since
the minor is not legally able to handle significant assets or money.)
Sadly, stories like Beth’s are all too familiar for the loved ones of divorced people who do not
make effective use of the estate planning tools. Naming a beneficiary for retirement benefits or
life insurance, or having a will can be a good start. However, the complexities of relationships,
post divorce, often render these basic tools inadequate. Luckily, there is a way to protect and
control your children’s inheritance fully.
Enter the Trust
A trust allows you to coordinate and control your estate in a way that no other tool can. For
those who are not yet familiar, a trust is a legal arrangement for managing your property while
you are alive and quickly passing it at your death. There are a few key players in the trust. First,
there is the person who created the trust, often called the Trustmaker, Grantor, or Settlor (this is
you). Second, there’s the Trustee who manages the assets owned by the trust (usually you
during your life and then anyone you select when you
are no longer able to manage the assets).
Finally, the Beneficiaries are the people who receive the benefit of the trust (usually you dur
ing your life, and then typically children or anyone else you choose).
How a Trust Protects Your Children’s Inheritance after a Divorce
A trust protects your children’s inheritance in a few distinct ways:
1. Since you select the Trustee, you can choose someone other than your ex -spouse to
manage the assets. In fact, you can even state that the ex-spouse can never be a
Trustee, if you wish. If Beth had a trust, she could have named her brother to be Trustee
after her death. Her brother (rather than her ex-husband) would then be in charge of the
2. Since you select the Beneficiaries, you can determine how the trust assets can be used
for them. You may have long-term goals for your beneficiaries, such as college,
purchasing of a first home, or starting a business. When you share your intent, your
Trustee can invest the assets appropriately and ensure your legacy is used the way you
want, rather than the assets being potentially wasted or used in a
way. If Beth had a trust, she could have
instructed how she wanted the inheritance used, rather
than leaving it to the whims of a court and her ex-husband.
3. A fully funded trust avoids probate, so your children do not have to deal with the cost,
publicity, and delay that is all-too-common in probate cases. Although “plain” beneficiary
designations, like the one that Beth used, also avoid probate, they may still open the
door for a guardianship or conservatorship court case, especially when your children are
minors. A fully funded trust avoids these guardianship and conservatorship cases. This
means more money for your intended beneficiaries and less for the lawyers and courts.
If you are divorced, it is essential to make sure your plan works
precisely the way you want.
Every situation is unique, but Chudleigh Law P.C. is here to help design a plan that achieves your goals and
works for your family. Dan Chudleigh is an experienced Orange County estate planning attorney, but he serves clients throughout California.
Dan Chudleigh lives in Laguana Beach, California with his wife and four children, and is a active member of Wealth Counsel, the nations
premier association for estate planning attorneys.
Call Chudleigh Law P.C. today to schedule a Family Wealth Planning Session. (949) 877-9140.