26 Feb Protecting inheritance from sister’s husband
Q. I’d like to leave a significant amount of money to my sister upon my death. I realize a gift is a gift and one can do what one wishes with it, but is there a way — or a trust — to ensure that her spouse doesn’t get his hands on whatever is left of it either while she’s living or especially if she dies before him?
— Being careful
A. The answer depends on what kind of assets you leave to her, and how.
If your sister receives assets outright upon your death, whether probate assets (assets received as a beneficiary under your will) or non-probate assets (assets received as a designated beneficiary, for example of a life insurance policy, retirement account or payable upon death account), she may leave those assets to whomever she desires, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
“The assets are subject to the claims of her creditors and, if not kept segregated from other marital assets, can be subject to equitable distribution should your sister and her husband divorce,” Romania said. “Even if the assets are maintained separate from other marital assets, upon divorce, the income from such inherited assets will be utilized in determining the obligation to pay or the ability to obtain spousal maintenance unless your sister and her husband have a premarital agreement providing otherwise.”
There is an alternative.
Romania said you can leave your sister assets in a trust which is created in your will. This is called a testamentary trust. Or you can leave assets through a separate document created during your lifetime, referred to as an inter vivos trust.
“Providing for your sister by the creation and funding of a properly prepared trust will also protect such assets, and the income from such assets, should your sister and her husband divorce,” Romania said. “Provided your sister cannot compel the trustee to make distributions to her, in a divorce a judge should not consider the income generated by the trust in determining an award of spousal maintenance.”
Any income or assets distributed from the trust to your sister will actually be owned by your sister and therefore be treated the same as an outright bequest, Romania said.
Then, any assets remaining in the trust upon your sister’s death will pass to beneficiaries you name when you create the trust, Romania said.
For example, you can provide that the assets continue to be held in trust for the benefit of your sister’s children and/or be paid to them when they reach a certain age, Romania said.
“If you decide to create a trust, it is important to consider the person or persons you name as trustee and the powers you give the trustee to make distribution,” she said.
For example, the trustee can have absolute discretion to make distribution of income and principal to the beneficiary, or the trustee can be required to distribute income annually and be directed to distribute principal for the benefit of the beneficiary’s health, education and support or alternately upon reaching a particular age, Romania said.
Make sure you also consider the taxes that may be due when you die.
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This story was first posted in February 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.