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 asks about a scenario where someone plans to leave most of her estate to her niece but wants to keep the niece’s estranged husband from getting his hands on the money. Although the default laws may vary state by state, no matter where she resides, she must be proactive and intentional about her gifting to make sure the funds go where she intends them to go.

First, there are tax consequences to consider and keep in mind. In states like New Jersey, the money may be subject to the New Jersey inheritance tax, which is assessed if the decedent is a New Jersey resident, regardless of where the beneficiary resides. 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%.

Next, the aunt needs to decide the manner in which she wants to leave the assets. One option is for the aunt to leave the assets to the niece outright.

The laws in many states, like Missouri, South Carolina, and New Jersey, 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 commingle it (in other words, mix it up and combine it) with the marital property.

Because there will be no administrative costs, the most economical way to transfer the property to the niece is for the aunt to leave it to the niece in her will, with instructions for her to keep it separate and apart from her marital property. However, this may not be the best way to leave property to the niece, because once it is given to the niece, it is out of the aunt’s control and it may be mixed up with the marital property, in which case the niece’s husband may be able to have access to it.

If, however, the aunt leaves the inheritance in trust, she can make certain the property isn’t commingled with marital assets by drafting a trust that will keep it separate from the rest of the niece’s property. 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 spousal 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. For instance, the trust can state specifically that the funds should then be held in trust for the niece’s children. That would further prevent her estranged husband from ever being able to make a claim against the funds.

If you are concerned about leaving property to someone you love, but that person is married to someone that you don’t, a trust can help you make sure that the inheritance goes to the actual person you want to receive it. Talk to an estate planning attorney who can provide you with some options.

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