Keeping Your Estate “IN THE FAMILY”

By Kirk R. Wilson, J.D., LL.M.

KEEPING YOUR ESTATE “IN THE FAMILY” By Kirk R. Wilson, J.D., LL.M. I am often asked whether an adult child’s inheritance will pass to that child’s spouse if the child predeceases the parents. The simple answer is that an inheritance passes by bloodline, i.e. from parent to child, or if a child is deceased, to the deceased child’s children, unless the parent’s Will or trust provides otherwise. Over the years I have had a number of clients specifically provide for their in-laws in the event that one of their children should predecease them. But most often parents elect to provide for their “descendants”, i.e. children and then grandchildren, and not for their sons or daughters in law.
In that situation, however, if the grandchildren are minors and the child’s surviving spouse is their legal guardian, the spouse will have some degree of control over the inheritance, subject to court supervision, until the children reach the age of 18. At that point, court supervision ceases and if the grandchildren are still emotionally dependent on the surviving parent, that parent may continue to have control over those assets. If parents are concerned about having a son or daughter in law controlling or having access to a grandchild’s inheritance, one option is to create a contingent trust (either under their Wills or through their living trust) for the grandchildren if one of their children predeceases them. The trust can continue until the grandchildren reach a suitable age, e.g., 25 or 30, and trust income and principal can be used to provide for their education, health and support, as needed, until the trust terminates. An independent trustee, or one of the parents’ other children, can be named as the trustee, or perhaps the son or daughter in law and another person, such as one of the other children, can be designated as co-trustees. If a child survives his or her parents and receives an inheritance, and if that child is married, that inheritance is the child’s separate property. As long as the child retains title to the inherited property in his or her own name, it will remain that child’s separate property, although under Texas law, any income generated by separate property (e.g. interest, dividends, or rent) will be the community property of the spouses. If that income is retained in accounts in the child’s sole name, it will be important for the child to retain good records in order to determine what part of the account is separate property and what part is community. Otherwise, if the separate property component cannot be accurately traced, the whole account may be treated as community property. If this is a concern to parents, they can create separate share trusts (either under their Wills or through their living trust) for each child after they have both passed away and designate the child as trustee of his or her own trust. This will ensure that the trust assets remain the child’s separate property, and based on a recent Texas court ruling, the income generated by the trust will be the child’s separate property (and not community property as would be the case outside of a trust). Also, if distributions of trust income and principal can only be made for the child’s health, education, support or maintenance – which is a fairly broad standard – the trust assets will be shielded from the child’s creditors as well. These are some of the options available to parents who have concerns about keeping their inheritance “in the family”.

[The author is a Woodlands-based estate planning attorney at the firm of O’Donnell, Ferebee, Medley & Frazer, P.C. He is licensed to practice law in Texas and California, is a board-certified probate, estate planning and trust law specialist in California, and holds an advanced law degree (LL.M.) in taxation. He can be reached at (281) 875-8200. The firm’s website is www.ofmflaw.com.]

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