You want to name your daughter as the beneficiary on your Roth IRA and 401(k) accounts, as well as your house and other investments. When you die, all those funds will become your daughter’s property. She owns the funds outright and without any strings attached.
But, your daughter is married. Her husband’s only source of income is a monthly stipend that he receives from a trust plus a little earned income from being a rideshare driver. He has at least $5,000 in credit card debt. It’s the classic case of the “no-good son-in-law.”
Fortunately, her husband is not named as a beneficiary, so he can’t get at her inheritance.
Or can he?
When your daughter becomes the owner of those assets, she may deposit the money in a checking account she owns with her husband – and that money becomes half his. If she uses the funds to pay for household expenses, purchase a family vehicle, or take the family on vacation, the money becomes “commingled” and he may get access simply because he’s married to her.
But it doesn’t have to be that way.
Nj.com’s recent article entitled “Can I protect my daughter’s inheritance from her husband?” explains that “bloodline trusts” were created for asset protection from no-good son-in-laws.
This trust arrangement ensures that assets distributed to the daughter aren’t commingled with the assets of her husband with extravagant tastes and an open checkbook. In addition, those assets would not be subject to equitable distribution in the event of a divorce.
One important question that arises if you pursue this type of trust involves who will be the trustee of that bloodline trust. If the daughter is the sole trustee over a bloodline trust, then the daughter would have to agree to this set-up or all the planning will be out the window.
For example, if she takes distributions from the trust and deposits them in a joint account with her husband, the money is available for equitable distribution. This means the daughter arguably has indicated that she does not think of her inheritance as a non-marital asset. A divorce court would see it the same way and award a portion to the husband in a break-up.
To address this, you might consider a co-trustee with the daughter or even a third party instead of the daughter.
There are many other potential questions and concerns that can arise depending on your and your children’s financial circumstances. Consult with an estate planning attorney to explore the possibilities of this type of approach.
Reference: nj.com (July 21, 2020) “Can I protect my daughter’s inheritance from her husband?”