Just because California is a community property State does not mean that an inheritance here is community property. For a married Californian, property received by gift or inheritance is separate property, not community property.

For many parents, that fact alone is enough protection for a child’s inheritance. Perhaps most parents have confidence that their children will do the “right thing” with the inheritance, be that keep it separate or commingle it. But many parents fear that any number of “bad results” will follow from their son-in-law or daughter-in-law’s influence over the inheritance.

Some parents fear their child’s inheritance may be lost in a divorce. Others fear that the in-law’s children from a prior marriage may wind up with the inheritance. Many simply want to protect their child from a divorce or from a manipulative in-law. Such parents wonder what can be done to protect their child’s inheritance.

Here are two planning options to help preserve the separate property character of your child’s inheritance:

• Your trust could state your wishes that, before your child receive his or her inheritance, your consult privately with an attorney as to how to preserve the separate property character of the inheritance. In other words, you want your child to get an education about this before the trustee gives the inheritance.
• Some parents believe that simply asking their child to get such an education before the inheritance is received will not work.  Perhaps the child cannot withstand the ongoing pressure or manipulations of the spouse. Perhaps the child is incapable of following directions. Perhaps it would inevitable that the child would commingle the separate property with community property so as to make the inheritance “50-50″ community property. Perhaps, to the parents’ dismay,  the child simply wants to make it “50-50.” For these parents, the options to explore involve leaving the child’s inheritance in trust. While there are countless types of such trusts, what they have in common is that the inheritance in trust remains separate property and is bound by the terms written by the parents for their child. For example, such a trust would spell out:

1. Appointment of the trustee and the successor trustees;
2. Guidelines for trust investments;
3. When trust income and trust principal can be used for the child (or the college education or other needs of the child’s children);
4. When the trust ends and who inherits the trust when it ends;
5. Who inherits if the child dies during the trust; and
6. Tax planning for the trust, including estate tax, income tax, property tax, and generation skipping transfer tax planning.

The point is that, in California,  there are many options available (from simple to more complicated) to protect your wishes as to how to preserve the separate property character of your beneficiary’s inheritance.

Copyright James J. Phillips January 2017