How to Protect Your Child’s Inheritance

When planning to leave an inheritance to your children, you probably have a good idea of how you'd like those assets to be used and who you'd eventually like to benefit from them. But what happens if your child gets divorced, passes away unexpectedly, or combines inherited assets with marital property?

Without proper planning, an inheritance intended for your child could eventually end up with their spouse or someone outside your family.

Fortunately, there are estate planning strategies that can help protect inherited assets and keep them available for future generations.

Why Parents May Want to Protect an Inheritance

Wanting to protect an inheritance doesn't necessarily mean you distrust your child's spouse. Many parents simply want to preserve assets for their children and grandchildren or ensure that property accumulated over generations stays within the family.

For example, if your child receives an inheritance and deposits it into a joint bank account with their spouse, those funds may become more difficult to distinguish from marital assets. The same concern can arise if inherited money is used to pay down the mortgage on a jointly owned home.

Although inheritances are generally considered nonmarital property in Minnesota when received by one spouse, how those assets are handled afterward can affect their protection in the event of divorce.

Another concern is what happens if your child passes away. If they inherit assets outright, those assets generally become part of their own estate and may eventually pass to their spouse rather than your grandchildren.

These possibilities make it important to consider not only who receives your assets, but also what happens to those assets afterward.

Using a Trust to Protect an Inheritance

One estate planning strategy is to leave assets to your child through a trust rather than distributing everything outright.

A properly structured trust can allow your child to benefit from inherited assets while placing conditions on how those assets are managed and distributed.

For example, a trust may provide funds for your child's health, education, maintenance, and support while keeping the remaining assets in trust for future beneficiaries, such as your grandchildren.

Because the assets remain in the trust rather than being distributed directly to your child, this arrangement may provide additional protection in the event of divorce or other circumstances.

However, the level of protection depends on how the trust is written, who controls the assets, and how distributions are handled.

Keeping Inherited Property Separate

If you choose to leave assets directly to your child, how those assets are handled after they are received becomes especially important.

Keeping inherited funds in an account titled solely in your child's name can help preserve their separate identity. Mixing inherited money with jointly owned accounts or using it to purchase jointly titled property may complicate matters.

For example, if your child uses inherited funds to purchase a home and places both spouses' names on the deed, the ownership arrangement may affect how that property is treated in a future divorce.

Maintaining clear records of inherited assets and avoiding unnecessary commingling can help protect the inheritance, although separate accounts alone do not guarantee protection in every situation.

What About Family Homes and Other Property?

Some parents are particularly concerned about keeping a family home, cabin, or other real estate within the family.

Rather than transferring ownership outright, an estate plan may use a trust to allow a child to use or occupy a property while directing where ownership will pass in the future.

For example, a trust could allow your child to use a family cabin during their lifetime while providing that the property eventually passes to your grandchildren.

Depending on the circumstances, other arrangements, such as a life estate, may also be considered.

These strategies require careful planning, particularly when addressing maintenance expenses, property taxes, and the rights of other beneficiaries.

What If You've Already Given Your Child an Inheritance?

If you've already transferred money or property to your child, there may still be steps they can take to help protect those assets.

Your child may be able to maintain remaining inherited funds in separately titled accounts, review their estate planning documents, or consider a postnuptual agreement with their spouse.

However, once assets have been transferred outright, you generally no longer control how they are managed or distributed.

An estate planning attorney can help evaluate the situation and determine whether additional planning may be beneficial.

Planning Ahead Makes a Difference

Protecting an inheritance is about more than deciding who receives your assets. It's also about considering how those assets may be used, managed, and passed along in the future.

Whether your goal is to provide financial security for your children, preserve family property, or leave a legacy for future generations, the right estate planning strategy can help you accomplish those goals.

At Wagner Oehler, Ltd., our attorneys can help you explore ways to structure your estate plan to reflect your wishes and protect the assets you've worked hard to build.

Take the Next Step

If you’re ready to start being proactive about your estate plan and want guidance tailored to your family, assets, and goals, contact Wagner Oehler, Ltd. to get started.

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