How Do You Keep Inheritance Money Separate?

Families with concerns about the durability of a child’s marriage are right to be concerned about protecting their children’s assets. For one family, where a mother wishes to give away all of her assets in the next year or two to her children and grandchildren, giving money directly to a son with an unstable marriage can be solved with the use of estate planning strategies, according to the article “Husband should keep inheritance in separate account” from The Reporter.

Everything a spouse earns while married is considered community or marital property in most states. However, a gift or inheritance is usually considered separate property. If the gift or inheritance is not kept totally separate, that protection can be easily lost.

An inheritance or gift should not only be kept in a separate account from the spouse, but it should be kept at an entirely different financial institution. Since accounts within financial institutions are usually accessed online, it would be very easy for a spouse to gain access to an account, since they have likely already arranged for access to all accounts.

No other assets should be placed into this separate account, or the separation of the account will be lost and some or all of the inheritance or gift will be considered belonging to both spouses.

The legal burden of proof will be on the son in this case, if funds are commingled. He will have to prove what portion of the account should be his and his alone.

Here is another issue: if the son does not believe that his spouse is a problem and that there is no reason to keep the inheritance or gift separate, or if he is being pressured by the spouse to put the money into a joint account, he may need some help from a family member.

This “help” comes in the form of the mother putting his gift in an irrevocable trust.

If the mother decides to give away more than $15,000 to any one person in any one calendar year, she needs to file a gift tax return with her income tax returns the following year. However, her unified credit protects the first $11.7 million of her assets from any gift and estate taxes, so she does not have to pay any gift tax.

The mother should consider whether she expects to apply for Medicaid. If she is giving her money away before a serious illness occurs because she is concerned about needing to spend down her life savings for long term care, she should work with an elder law attorney. Giving money away in a lump sum would make her ineligible for Medicaid for at least five years in most states.

The best solution is for the mother to meet with an estate planning attorney who can work with her to determine the best way to protect her gift to her son and protect her assets if she expects to need long term care.

People often attempt to find simple workarounds to complex estate planning issues, and these DIY solutions usually backfire. It is smarter to speak with an experienced elder law attorney, who can help the mother and protect the son from making an expensive and stressful mistake.

Reference: The Reporter (Dec. 20, 2020) “Husband should keep inheritance in separate account”