After a divorce, protecting your children’s financial future becomes even more critical. Without careful planning, your children’s inheritance may not end up in the right hands. Here’s what every divorced parent needs to know about safeguarding their children’s inheritance and protecting your children’s inheritance after divorce: what you need to know.
Why Beneficiary Designations Alone May Fall Short
Consider this story: Brooke recently finalized her divorce and designated her two minor children as beneficiaries on her retirement plan and life insurance policy. Her intent was clear—she did not want her ex-husband to have any control over her children’s inheritance. Tragically, Brooke passed away a year after her divorce. Because her children were minors, the retirement plan and insurance company required an adult to manage the funds on their behalf.
Without additional legal documentation, the court appointed Brooke’s ex-husband to manage her children’s inheritance. In some states, this role is called a “guardian” or “conservator.” Unfortunately, situations like Brooke’s are all too common for those who rely solely on beneficiary designations or wills without considering more comprehensive estate planning options. This highlights why you need to know about protecting your children’s inheritance after divorce.
Using a Trust to Protect Your Children’s Inheritance
A trust offers divorced parents an effective way of protecting your children’s inheritance after divorce. Here’s how a trust works and why it might be the best option for your family.
What is a Trust?
A trust is a legal arrangement that allows you to manage your assets for your benefit while you’re alive and then pass them to your chosen beneficiaries after your death. Three main parties are involved:
- Trustmaker or Trustor: The person who creates the trust (you).
- Trustee: The individual who manages the assets in the trust, typically you while you’re alive, and then someone you select after your death.
- Beneficiaries: The individuals or groups who will receive the trust’s assets after you pass away, usually your children.
How a Trust Protects Your Children’s Inheritance After Divorce
- Control Over Who Manages the Inheritance – As the trustor, you can select someone other than your ex-spouse as the trustee. If Brooke had created a trust, she could have appointed a trusted family member to manage the inheritance for her children. This approach would give Brooke’s chosen trustee—not her ex-husband—control over her children’s inheritance, even if her ex-husband had legal custody of the children.
- Ability to Specify When and How Funds Are Used – A trust allows you to dictate exactly how the inheritance is used for your children. You can outline specific goals for their inheritance, such as funding their education or helping them buy a first home. By detailing your intentions, your chosen trustee will follow your instructions, ensuring your children’s inheritance aligns with your vision. If Brooke had created a trust, she could have included specific guidelines, keeping the inheritance safe from court oversight and potential misuse.
- Avoiding Probate and Court Supervision – With a fully funded trust, your children’s inheritance bypasses probate, saving time, cost, and potential publicity. Although beneficiary designations also avoid probate, they can still lead to court supervision, particularly when children are involved. A trust keeps the inheritance private and under the trustee’s management, allowing more funds to go directly to your children and less to legal fees and court costs.
Setting Up Your Trust and Updating Beneficiaries
To ensure the trust effectively protects your children’s inheritance, you must update beneficiary designations on critical accounts like retirement plans and life insurance policies. For Brooke, naming her trust—rather than her minor children—as the beneficiary would have safeguarded her assets and kept them under the control of her chosen trustee rather than get tied up in a conservatorship proceeding.
Secure Your Children’s Future With a Customized Plan
If you’re divorced, it’s essential to plan precisely and proactively to protect your children’s inheritance. Every situation is unique, and we’re here to design a plan tailored to your family’s needs. Contact us today to learn how we can help secure your children’s financial future and ensure your intentions are honored by protecting your children’s inheritance after divorce.
