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 think the way you do. They don’t want to look down from above and see their ex-son-in-law driving a Lexus bought and paid for with their life savings.

Normally, you do not have to worry about your childrens’ spouses inheriting anything from you. They will get nothing upon your deaths, 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 as being their sole and separate property.

A better alternative is for you to leave your children their inherited assets within a dynasty trust. The idea here is that if your children receive their inheritance within its own trust, with each child being his or her own trustee, your children will have a safer means of protecting the separate property nature of their inheritance. When your son-in-law says to your daughter, “Why can’t you put my name on the account? Don’t you love me?” she can reply “Gee, I’d love to, but my parents’ darn lawyer locked up my inheritance in a trust.”

Dynasty trusts also provide additional protection from your children’s estate tax liability and protection from their creditors. If you are passing an inheritance to your children and want to do the most you can to keep it in the family, you should consider creating a dynasty trust.

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at 996-4505, or at www.lentillem.com. Len also answers legal questions each weekday, noon to 12:45 p.m., and Sundays, 4-7 p.m., on KGO Radio 810 AM.