Can I Keep a Loved One’s Inheritance From Their Spouse?

A recent nj.com article asks, “How do I protect my niece’s inheritance from her husband?” The article says that in a scenario where someone plans to leave most of her estate to her niece but doesn’t want her estranged husband to get his hands on the money, she must be proactive to make sure the funds go where she intends them to go.

If this happens in a state like New Jersey, that has an State Inheritance Tax, the niece’s inheritance will be subject to the New Jersey inheritance tax. The tax is levied based on the relationship of the deceased to the beneficiary. In this case, the niece’s inheritance would be subject to an inheritance tax of 15 to 16%.  This inheritance tax is assessed, because the aunt is a New Jersey resident. It doesn’t matter where the beneficiary resides.

Two options are for the aunt to leave the assets to the niece outright or in trust.

The laws in many states say that unless the parties otherwise agree, upon divorce there will be equitable distribution of their marital property.  Marital property generally doesn’t include the property received by gift or inheritance, as long as that person didn’t co-mingle it with the marital property.

Therefore, the most economical way to transfer property to the niece, is to leave it to her in the testator’s will, with instructions for the niece to keep it separate and apart from her marital property. But, an outright bequest may not be the best way to leave property to the niece, even though it’s probably the most economical method for the aunt.

If the aunt leaves the inheritance in a properly drafted trust, the assets can be kept separate and therefore won’t be commingled with the niece’s marital assets.  It can even be drafted so that the niece’s inheritance remains in an irrevocable trust with instructions on exactly how the niece can access the funds. This type of trust can even build in asset protection for the niece, so that these inherited assets cannot be taken in a lawsuit, by the niece’s creditors, in a bankruptcy and yes, even in a divorce.

Further, if the trust is properly prepared by an experienced estate planning attorney, the income from the trust will likely not be used to decrease any support to which the niece may otherwise be entitled from her spouse, in the event that they divorce down the road. The trust can also protect against other events, by instructing to whom funds should be paid upon the premature death of the niece. That would further prevent her estranged husband from ever being able to make a claim against the funds.

Reference: nj.com (August 21, 2019) “How do I protect my niece’s inheritance from her husband?”