Divorce is a reality that is difficult to anticipate, but one that can be planned for through proper Estate Planning. The Illinois Marriage and Dissolution of Marriage Act (the “Act”) provides that although property acquired by gift, legacy or descent is considered non-marital property, when an individual transfers non-marital property into some form of co-ownership with his or her spouse, the property is then presumed to be marital. In other words, an inheritance is considered the separate property of the beneficiary so long as it is handled properly. Failing to understand the requirements for keeping property separate and to plan accordingly can subject (a) an inheritance you receive to your own divorce or (b) an inheritance you leave to the beneficiary’s divorce.
Some prominent court decisions give us on-point examples of the consequences of failing to plan:
1. Harold invested his inheritance in a home that was titled to himself and his wife, Wanda, in joint tenancy.
2. Winona deposited her worker’s compensation check into a joint checking account with her husband, Hank. The funds in the account were used to pay the couple’s household expenses.
3. Upon their marriage, Howard sold his residence and used the funds to purchase a home with his new wife, Wendy, titled jointly between them as tenants by the entirety.
4. Willow owned rental property prior to her marriage. Following her marriage to Harry, she re-titled the rental property to herself and her husband in joint tenancy.
In each of the examples above, upon divorce, the original owner of the property would likely lose its non-marital status, thus subjecting it to equitable distribution unless the owner could show by clear and convincing evidence that he or she did not intend to make a gift of the property to the spouse.
As the giftor, making a gift through a Revocable Living Trust or an Irrevocable Gift Trust can protect your assets from a beneficiary’s divorce. Such trusts allow the assets to be managed by the trustee until your beneficiaries are of an age where they are responsible enough to manage such assets themselves and consult an attorney who will advise them on how to hold the assets. Additionally, through the trust document, a trustee can be empowered to protect trust assets from the beneficiary’s creditors.
Although no one expects their own marriage or the marriage of a child to fail, it is a real possibility that must be considered. By surrounding yourself with the right advisors and through proper planning, gifts and inheritances can be protected.