A difficult problem facing lawyers who do estate planning work comes from the fact that parents, in the event of a child's divorce, may not want their hard-earned wealth ending up in the hands of a former son-in-law or daughter-in-law.
Colorado's divorce laws help here to some extent. They say that, in the event of a divorce, the judge handling the proceeding must divide up "marital property" between the divorcing parties in an equitable manner. Marital property includes most property acquired by either spouse during the marriage. However, property received by inheritance is considered separate property and not marital property. Therefore, if a parent dies and leaves assets to a child who then gets divorced, the ex-son-in-law or daughter-in-law has no claim to the inheritance as marital property.
But - and here's where the complication arises - any appreciation in the value of an inheritance after it is received is marital property and is subject to division in a divorce.
Leaving wealth to children by means of a trust, instead of an outright inheritance, has the potential to assist in no-money-to- the-ex-spouse estate planning. That's because, under a trust, a parent's wealth can be transferred to a child over a period of time rather than in a lump sum at death. In this manner, there will be less appreciation after a transfer is received to be treated as marital property. And, under a trust, some of the wealth transfer may not occur until after the divorce.
This, however, is tricky business for estate planners because of a 2001 Colorado Supreme Court decision that concluded that a wife had acquired a vested property interest in a trust set up by her parents at the time she was named as a beneficiary of the trust - even though, at that time, she didn't actually receive any money and might never receive any money if the assets of the trust were to be exhausted by her parents during their lifetime.
Under this decision, all of the appreciation in the wife's interest in the trust, uncertain though that interest might be, was treated as marital property and had to be shared with the husband.
The end run around this court decision seems to involve having parents use trusts that have independent trustees with wide discretion as to how trust assets are distributed, and that have grandchildren as the recipients of the trust's remaining assets after the children have died. With this structure, the argument that a child will inevitably inherit from the trust, and should therefore be deemed to have received an inheritance at the time the child was first named as a beneficiary of the trust, becomes less supportable. The child, in the context of a divorce, can take the position that what he or she has is a mere expectancy and not a property right.
In any event, if you're a parent who, upon the divorce of a child, doesn't want your wealth to leave the family blood line, it may be time to consult with your estate planning professional about this aspect of your plan.
Jim Flynn is a private attorney at Flynn Wright & Fredman LLC. Reach him at firstname.lastname@example.org.