How do I protect money gifted to kids if they divorce?

[Texas Proud]

I think it is a fair question... the gift is intended for their son... and not 50/50 for their son and a potential future spouse (who they may or may not like).

I think you could put it in a trust an make him the sole beneficiary.

https://www.barrons.com/articles/why-some-trusts-crumble-and-some-endure-during-divorce-1458967051

Or you could keep it an put it aside in an account that he is the sole beneficiary of when you pass, but if you pass while he is married then I think those would become marital assets and defeat the purpose.

Most states are separate property states so it will remain separate property.... for Texas it is also considered separate as long as you keep it out of a common account...

 

[imnontrad]

If you gift money/equities to a child and they NEVER co-mingle the gift, their spouse has no claim on it as a joint asset. That's how I protected my gifts from my parents during my divorce.

 

[euro]

I'm in the camp of "a gift is just that - a gift".
Once you give someone something it's theirs to do with as they see fit. Period.

I agree with this and similar answers. Don't attach strings to gifts.

 

[Joylush]

I agree with this and similar answers. Don't attach strings to gifts.

Yet there is a difference between attaching strings to a gift and teaching someone how to protect it. A big difference.

 

[2177V]

We got burned when we funded a SIL's IRA contributions and my daughter divorced him. It wasn't a lot, but it left a sour taste.
I want to even things up with my son as we have paid for my daughter to go to Dental school, $270k to $290k before she is done. He's still single, I'm comfortable he won't spend it, he is working, investing and funding Roth's, so doing well already.

Is there a way to protect any money we gift him from a spouse if he should divorce? Would it be best to get a prenuptial for any money going into the marriage? What about protecting gifted money after the marriage.

It may depend on whether your state considers a couple's assets as "community property". During a divorce, assets are split 50/50. Buying property and have the ownership in your son's name, your name and your own wife's name may be an option. A
50/50 split of his 1/3 ownership share is only 1/6 the value of property. A prenuptial may cause his fiancee to seek another partner and I have seen that situation happen to my sister in law. My sister in law told her fiancee to take a hike and refused to see him again. "Trust" is the foundation of a good relationship. A breach of that trust can end the relationship. Saying "Will you marry me? ...and will you sign a prenuptial?" is not being very romantic and most woman are looking for unconditional love.

 

[llolly]

Did your DD get 1/2 of the joint net worth? Because if so, she got back 1/2 of your IRA contribution. And if she didn't get her 1/2, then what difference did it make whether you gave the money to her or him, because he would have gotten it anyway?

I don't plan on giving any of my kids such a large gift as you are describing anyway -- if I felt there was such a large difference between kids, then I would set aside a separate account and put that child as sole heir (and gift as seemed appropriate from it during my lifetime).

 

[Skitso999]

In my state gifts and inheritances which are never commingled are the separate property of the individual and not subject to division in a divorce. Nothing fancy is required, just keep it in a separate account. Some other states have similar rules, but I don't know which ones do and which one's don't.

I agree with this approach. Make sure the son knows not to commingle it!

I agree with your concern about the future daughter-in-law. Its pretty common for the woman (or the man) to wander off to be married to another person, through no fault of the man (or the woman). Keep it away from the in-laws if you have a chance. After you die (tell the son this) tell the son he shouldn't be too willing to commingle those funds!

That lump of money will also be a reason for the original marriage to stay intact! How about that thought?!

 

[Skitso999]

We use a bloodline trust.
It follows our bloodline.
It passes our estate on to our son, his kids and by passes his wife.
Any trust attorney should be able to do this for you.
It is not that uncommon.

This is the type of thing I want to do with both my children after my wife's passing. Divorce is as common as dirt. Protect your children first!

 

[Time2]

I agree with this approach. Make sure the son knows not to commingle it!

I agree with your concern about the future daughter-in-law. Its pretty common for the woman (or the man) to wander off to be married to another person, through no fault of the man (or the woman). Keep it away from the in-laws if you have a chance. After you die (tell the son this) tell the son he shouldn't be too willing to commingle those funds!

That lump of money will also be a reason for the original marriage to stay intact! How about that thought?!

Commingle, how is that defined? Say the un-commingled fund generates $5k of dividends, and the joint account pays the tax bill? Do you need file Married Filing Separate? Can you pull money from the Un-Commingled account, put it in joint checking and use it as a down payment on a joint house? What are the rules of Not commingling?

 

[Skitso999]

Commingle, how is that defined? Say the un-commingled fund generates $5k of dividends, and the joint account pays the tax bill? Do you need file Married Filing Separate? Can you pull money from the Un-Commingled account, put it in joint checking and use it as a down payment on a joint house? What are the rules of Not commingling?

If the un-commingled account generates taxes, then the taxes from it would be paid out of that same account. Get the accountant to tell you how much tax is due to the un-commingled account. Not a big problem.

 

[euro]

Yet there is a difference between attaching strings to a gift and teaching someone how to protect it. A big difference.

Yes, but one doesn’t require the other. You can educate and give a no strings gift both at the same time.

 

[Joylush]

Yes, but one doesn’t require the other. You can educate and give a no strings gift both at the same time.

Of course. There are different levels of protection. You can give the gift outright and educate about protection for a no strings attached approach. Or you can establish a trust for more protection. You can limit what the funds can be used for or choose not to. If you choose not to it is akin to being no strings attached. However in a divorce, or if creditors come calling what is remaining in the trust is still protected.

It seems some people are hung up by the word gift.

 

[cathy63]

Commingle, how is that defined? Say the un-commingled fund generates $5k of dividends, and the joint account pays the tax bill? Do you need file Married Filing Separate? Can you pull money from the Un-Commingled account, put it in joint checking and use it as a down payment on a joint house? What are the rules of Not commingling?

It depends on the state. If you live in Idaho, Louisiana, Texas, or Wisconsin, the income from the separate property is itself community property, so it can (probably should) be removed from the separate account and used to pay the taxes or for ordinary spending. See IRS Pub 555.

In the other states, you can file MFS, but that usually ends up costing a lot more, and it can be very complex in the 9 community property states. Another option would be to file MFJ but figure the taxes with and without the separate income and then use that income to pay the extra tax. The spouse with the separate property would have to keep records of the annual income and the tax paid for the separate account.

Yes, you can pull some of the money from a separate account and put it in a joint account and use it to buy shared property. That portion of the money is then commingled, but whatever's left in the account is still separate property.

 

[ivinsfan]

Of course. There are different levels of protection. You can give the gift outright and educate about protection for a no strings attached approach. Or you can establish a trust for more protection. You can limit what the funds can be used for or choose not to. If you choose not to it is akin to being no strings attached. However in a divorce, or if creditors come calling what is remaining in the trust is still protected.

It seems some people are hung up by the word gift.

And some people are hung up by the word money...we farm and when my DD's and dear nephews were young children we were vigilant about tracking their movements and keeping them away from machinery and cattle. It was for their protection. We controlled where they were 24/7 to be protective.



If you want to control, control, but calling it protection doesn't mean it's not controlling.



As for creditors why shouldn't they be payed the money they are owed?

 

[Winemaker]

DW and I have rental property.

Several years ago when my DMIL had a health condition we demanded her to come to live near us. We boughta house for her to live in and it was in DW's name, for estate purposes. DMIL did not want to take anything from us, so we decided to rent it to her. The bank WOULD NOT permit it when we got the mortgage. That suited us fine, because it wasn't a investment decision originally, but we thought we would run into "Gifting issues." Our attorney and CPA agreed with the bank, so we bought the house and DMIL lived in it until she passed.

We then turned it into a rental after her passing. And we just sold it last week, as a rental SFH took too much of my time, cutting grass, bushes, clearing snow, etc.

 

[MarieIG]

We use a bloodline trust.
It follows our bloodline.
It passes our estate on to our son, his kids and by passes his wife.
Any trust attorney should be able to do this for you.
It is not that uncommon.

I have two DILs who are professionals - would not need $. A third gave up her career to allow DS to pursue his; and to raise the GC - including a special needs child. I cannot begin to describe how much care DGC needs. I would want to provide for that DDIL.

 

[youbet]

A prenuptial may cause his fiancee to seek another partner and I have seen that situation happen to my sister in law. My sister in law told her fiancee to take a hike and refused to see him again. "Trust" is the foundation of a good relationship. A breach of that trust can end the relationship. Saying "Will you marry me? ...and will you sign a prenuptial?" is not being very romantic and most woman are looking for unconditional love.

Yet these days gals with significant assets going into a marriage are often the ones asking for a prenuptial agreement. Men are still perceived as more greedy and conniving than women when they ask for a prenuptial agreement but our evolving culture seems to be slowly changing that.

 

[Joylush]

And some people are hung up by the word money...we farm and when my DD's and dear nephews were young children we were vigilant about tracking their movements and keeping them away from machinery and cattle. It was for their protection. We controlled where they were 24/7 to be protective.



If you want to control, control, but calling it protection doesn't mean it's not controlling.



As for creditors why shouldn't they be payed the money they are owed?

I think there is a big difference between being protective v being controlling. Being protective is an act of love and caring. Being controlling comes more from a place of distrust or insecurity.

Wanting to protect your family member should make them feel loved and cared for. You may want to maintain control because it’s others you distrust or are insecure about. Nothing wrong with that.

Wanting to protect your family member isn’t about distrusting them, it’s about distrusting others. Thus it’s important to educate them on how best to protect themselves, because you won’t be around forever.

As for creditors....not with my money. They may or may not be owed. Steps can be taken to protect assets from creditors. For instance trusts, homesteader property, etc....It’s all about creating protection for yourself and your loved ones because there are unscrupulous people out there as well frivolous lawsuits.

 

[MarieIG]

Yet these days gals with significant assets going into a marriage are often the ones asking for a prenuptial agreement. Men are still perceived as more greedy and conniving than women when they ask for a prenuptial agreement bKut our evolving culture seems to be slowly changing that.

I think the age of the couple and whether they had been married previously would make a difference. I was quite young when I got married and would have looked at a fiancée as if he had two heads if he had whipped out a pre-nup; and assumed he didn't care about me. MIL was actually looking for a dowry from my family (I was highly indignant about that) but DH quickly stepped up to the plate and told her to put a sock in it.

As an older person; I can see where it can come into play with accumulated assets and children from prior marriages - but a second marriage is not on my agenda.

 

[youbet]

I think there is a big difference between being protective v being controlling. Being protective is an act of love and caring. Being controlling comes more from a place of distrust or insecurity.

Wanting to protect your family member should make them feel loved and cared for. You may want to maintain control because it’s others you distrust or are insecure about. Nothing wrong with that.

Wanting to protect your family member isn’t about distrusting them, it’s about distrusting others. Thus it’s important to educate them on how best to protect themselves, because you won’t be around forever.

As for creditors....not with my money. They may or may not be owed. Steps can be taken to protect assets from creditors. For instance trusts, homesteader property, etc....It’s all about creating protection for yourself and your loved ones because there are unscrupulous people out there as well frivolous lawsuits.

Isn't it really a distinction without a difference? For example, you create a trust with a child as beneficiary which contains stipulations regarding how funds are dispersed, when and for what. From one point of view, you're protecting the child. Yet from another point of view, it could be interpreted as being controlling, since in fact, it does control. It's the control that provides the protection.

I don't think it matters which you call it since whether the action is perceived as protection or control is likely only in the eyes of the observer. Personally, I view OP's objective as being more of "control." He doesn't trust that his son will have the moxy and/or desire to protect his financial interests in marriage. The son might not be into financial details like these, he might be love-struck or his bride may simply outwit him. OP would like to have control (perhaps indirectly) so what he considers a bad decision on his son's part would not be possible.

BTW, I tend to be in agreement with OP. My son has been married 21 years. He and his DW met at engineering school and I've liked her since the day we met. Still, since my son entered their marriage with some assets left to him by his grandfather and she had none and my son was/is the type of person to not "sweat those details," I was hesitant to transfer further assets to him at first. But as the years have gone by, that's changed. She's become the daughter I never had, the mother of my grandchildren, a kindred spirit (we followed similar career paths and share many values) and sometimes even my confidant. It's doesn't seem like they would ever split up, but if they did, I wouldn't cringe for a minute when she left with the car I bought her, the IRA's I have funded, etc. Hopefully that's how it works out for OP. But those first few years, you just don't know.

 

[youbet]

I think the age of the couple and whether they had been married previously would make a difference.

Absolutely.

I was quite young when I got married and would have looked at a fiancée as if he had two heads if he had whipped out a pre-nup; and assumed he didn't care about me. MIL was actually looking for a dowry from my family (I was highly indignant about that) but DH quickly stepped up to the plate and told her to put a sock in it.

I was also on the youngish side (22 and just out of college) when DW and I eloped. I had a net worth of about $2k and DW was in debt about $10k due to student loans. ($10k doesn't sound like a lot now, but that was more than her first year's salary as a Chicago Public Schools teacher.) I guess you could say in our situation that I was the one who arrived with a dowry!

As an older person; I can see where it can come into play with accumulated assets and children from prior marriages - but a second marriage is not on my agenda.

I agree and think the same way.

I do feel that for young people entering their first marriage, being the man or the woman should not be a consideration regarding the necessity of a prenup. If one partner has some significant assets or earning power going into the marriage and the other does not and a prenup is desired, it doesn't matter if it is the bride or groom. I sense there is still some inappropriate bias against men in this regard (he is more "evil" for asking for a prenup than a women would be in reversed circumstances) but that does seem to be slowly changing. Thank goodness.

 

[OldShooter]

... For example, you create a trust with a child as beneficiary which contains stipulations regarding how funds are dispersed, when and for what. From one point of view, you're protecting the child. Yet from another point of view, it could be interpreted as being controlling, since in fact, it does control. It's the control that provides the protection. ...

IMO the potential issue depends mostly how the beneficiary(ies)view the trust. DS will be getting his $$ in a trust managed by Schwab. He is very happy with this because he is not financially skilled and know that he might be vulnerable to predatory "advisors." The trust terms are not highly constraining; the trustee has flexibility to deal with unanticipated situations like expensive health problems. DS doesn't view this as controlling at all.

 

[MrsHaloFIRE]

I've been involved in a prenup discussion. My best friend who owns her own med practice and 2 homes was getting married and called me to walk through the prenup with her to make sure it sounded right. Luckily her prenup was required by her medical partnership agreement. Which she wrote Smart one there.

My DH mentioned a prenup to me in passing while engaged and I have him a firm no. I had nothing but I wanted him to have lots of skin in the game BC I intended to keep him. Has worked out well for 16 years thus far- cheaper to keep me

As far as sheltering gifts from potential future DS spouse my suggestion would be to explain to DS ramifications of commingling and your intent, then gift it and shut up. Ultimately up to him whether he invests it, drives it, drinks it, etc. "Hand from the grave" not so cool for adult healthyminded able-bodied children in my opinion.

Yet these days gals with significant assets going into a marriage are often the ones asking for a prenuptial agreement. Men are still perceived as more greedy and conniving than women when they ask for a prenuptial agreement but our evolving culture seems to be slowly changing that.

 

[MarieIG]

IMO the potential issue depends mostly how the beneficiary(ies)view the trust. DS will be getting his $$ in a trust managed by Schwab. He is very happy with this because he is not financially skilled and know that he might be vulnerable to predatory "advisors." The trust terms are not highly constraining; the trustee has flexibility to deal with unanticipated situations like expensive health problems. DS doesn't view this as controlling at all.

Good for him. If someone had been kind enough to leave me income from a trust; I would have been appreciative, not indignant. After all, nobody had to leave me anything.

 

[youbet]

IMO the potential issue depends mostly how the beneficiary(ies)view the trust. DS will be getting his $$ in a trust managed by Schwab. He is very happy with this because he is not financially skilled and know that he might be vulnerable to predatory "advisors." The trust terms are not highly constraining; the trustee has flexibility to deal with unanticipated situations like expensive health problems. DS doesn't view this as controlling at all.

Sounds like you're fully agreeing with me OldShooter.

From my post:

I don't think it matters which you call it since whether the action is perceived as protection or control is likely only in the eyes of the observer.

That same trust might be viewed as "controlling" by another recipient. Or your son might view it as controlling if it was changed to be less flexible, have more constraints, etc.

Again, controlling or protective, a distinction without a difference.