Dear Len & Rosie, We have three grown children with children of their own and we have a trust. We want our children to be the beneficiaries but want to set it up so that, should they divorce, the spouse would not have a right to the inheritance.

I know that an inheritance comes into the marriage as separate property but I thought that, if the pool is used for community expenses, mortgage, etc. that the whole thing could become community property. Yuk. Is there a way to ensure that it will stay separate property? We don’t mind if our children purposely use the funds for their families, but would like to set it up so that they can keep the remainder of the inheritance should they divorce. What should we be looking for?

Patricia

Dear Patricia, Most parents don’t want to look down from above and see their ex-son-in-law driving a Lexus bought and paid for with their daughter’s inheritance. You don’t have to worry about your childrens’ spouses inheriting anything from you. They will get nothing from you unless you specifically say so in your wills or trust. What you have to worry about is what happens to the inheritance once it’s in the hands of your children.

An inheritance is separate property, But many children, either by mistake or on purpose, commingle their inheritance with community property assets, or even transmute their inheritance to community property. There are a couple of options available to you to help your children not do this.

The first is education. The trick to keeping separate property separate is to keep it separate. While that may not make much sense, it can be pretty simple. Your children should know to put any inherited assets into brand new accounts in their names alone, preferably at different financial institutions. Then, they need to know that they should never put anything else into these accounts that may be community property. If your children create trusts to avoid probate, these accounts should be identified within the trust instrument as their sole and separate property.

A better alternative is for you to leave your children their inherited assets within dynasty trusts. The idea here is that if your children receive their inheritance within its own trust, with each child being his or her own trustee, unless you want someone else in charge. Your children will have a safer means of protecting the separate property nature of the inheritance. The trust will make payments to your child for purposes of support and education. The trust can buy a home for your child to live in, but it’s best for the home to be held within the trust. That way, if a child is divorced, his or her inheritance from you will be protected.

There are three other principal benefits to a dynasty trust. Since the child doesn’t really own his or her inheritance within the trust, it’s largely protected from creditors through the trust’s spendthrift clause, except for taxes and child support debts. Also, all or a large portion of the trust assets can be exempted from estate tax when your child passes away.

On top of all this, you have the ability to place restrictions on how your children may dispose of their inheritance upon their own deaths. You can prohibit your children from leaving all or most of the dynasty trust to their spouses, for example. With a dynasty trust you can literally and legally create a dynasty intended to benefit your family for generations.

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, 996-4505, or www.lentillem.com. Len also answers legal questions each weekday, noon to 1 p.m., and Sundays, 4-7 p.m., on KGO Radio 810 AM.