How to Safeguard Gifts to Children After Death

“When is a Gift Not a Gift?”

By: Christopher Ha, Attorney with TCV Law Group, Certified Financial Planner ®

The purpose of this blog post is to highlight 4 (four) of the ways that gifts to children or other beneficiaries can be seized or reduced by outside actors or unanticipated circumstances.

Many of the issues raised by this blog post can be prevented with a well-drafted estate plan (e.g., Will or Trust) that provides asset protection features such as asset protection trusts for children.

Case 1: Divorce. You leave $50,000 to your daughter in your Will. You pass away and the Executor named in your Will writes a $50,000 check to your daughter according to the instructions in your Will. After your daughter receives the $50,000, her husband divorces her.

Can the husband drag the $50,000 into the marital property division where there is a good chance he will get 50% of the $50,000 that you left your daughter?

The general rule under the Texas Family Code is that property owned while married is community property unless an exception applies. This matters to your daughter because community property is subject to division at divorce.

Exception: inherited property is separate property but it must be proven by clear and convincing evidence (e.g., bank statements). Otherwise the general rule applies and all marital property is treated as community property.

In many cases a child will commingle her inherited assets with her spouse, e.g., by buying a house together, making mortgage payments on a shared house, or depositing the money into a joint checking account.

Under Texas law, your daughter’s separate property can lose its separate property character if it gets commingled with the property of her spouse. Result to daughter is that her inheritance can be seized in a divorce.

Possible solution – leave your inheritance to your daughter in an asset protection trust account over which she is the sole Trustee (signer). If the trust is set up properly it can ensure that the inheritance remains under your daughter’s sole control as her separate property even if she gets divorced, thereby preventing a loss of 50% or more of her inheritance.

Case 2: Creditor Lawsuits. You leave $50,000 to your daughter via your Will. Following the inheritance, your daughter’s substantial debts catch up with her and she declares bankruptcy.

Money held in your daughter’s individual name is generally subject to seizure by the bankruptcy trustee to pay off your daughter’s creditors.

The Texas Property Code shields certain assets from seizure by creditors such as a homestead property or current wages but provides no such creditor protection for inherited cash.

Possible solution: leave the cash to your daughter in an asset protection trust account. If the trust is properly set up as a “spendthrift trust,” the trust account’s assets can be set aside for the benefit of your daughter but NOT be subject to her debts because the trust is set up as an entity separate from your daughter.

Case 3: Guardianship. You leave $50,000 to your grandchild in your Will. She is a minor when she inherits the money from you.

Under Texas law a minor cannot hold custody to property in the minor’s sole name. The property must be held in a custodial account with a guardian as a signer.

Status as a guardian is not automatic in Texas. Guardianship requires a signed court order appointing a guardian even if your grandchild’s parents are alive.

Possible solution: leave the cash to your grandchild in a minor’s trust for her benefit. With proper drafting you can create a trust that lets you choose who manages the money for your grandchild’s benefit (e.g., you can name the grandchild’s financially responsible Mother as Trustee) while also avoiding the time and expense of having a guardian appointed.

When you choose the provisions for your grandchild’s trust, you can provide guidance to the Trustee on how the inheritance should be invested and then spent for your grandchild’s benefit. For example, if you own a unique assets such as a family business or family ranch, you can give your Trustee permission to hold those positions for the long term.

In contrast, in a guardianship proceeding, there is no guarantee you would approve of the guardian appointed for your daughter nor can you provide any legally binding guidance to the guardian on how the inheritance is to be invested or spent for the benefit of your grandchild.

Case 4: Special needs child. You leave $50,000 to your special needs grandchild in your Will.

Leaving the money to the grandchild in the grandchild’s direct name may disqualify the grandchild from receiving government benefits. For example, Texas Medicaid has both an asset and monthly income test to qualify for benefits.

Losing eligibility government benefits may mean that your grandchild loses access to meaningful benefits such as subsidized medical insurance.

Possible solution: leave the cash to your grandchild in a special needs trust that ensures the money is still available for the benefit of your grandchild but does not count against your grandchild for purposes of qualifying for government benefits.

We hope this information has been helpful. If you would like to ensure that gifts to your children or other beneficiaries is protected so it is for their benefit and not for the benefit of an unintended creditor or in-law, please contact our office at (512) 263-5400 or to schedule a time to update or review your estate plan.

Full disclosure: the information in this blog post is general in nature and exceptions apply. You should consult with an estate planning attorney for personalized advice on your specific facts and circumstances.