Here’s a hypothetical situation for Colorado readers to consider. Imagine you are going through or are about to go through a divorce where a lot of assets are at stake. Now imagine you stand to gain a sizable inheritance from your parents when they pass on, and you and your parents want that inheritance to be protected.
In Colorado, property division laws surrounding divorce state that property will be divided in an “equitable” fashion. Unlike community property states, where marital assets are divided equally, equitable in this case does not mean everything will be split right down the middle. And an inheritance is not considered a marital asset in the eyes of the law.
However, if you receive an inheritance while married, even though your spouse will not get any of the inheritance in the property division he or she will receive half the value of however much the inheritance has appreciated in value.
One way to get around this is to have your parents establish a trust. Under the terms of a trust, the beneficiary can receive the money in small payments over time, which means the money will appreciate less after it has been distributed. And the trust can be constructed so money wouldn’t be distributed until after a divorce occurred.
While it’s not something that people want to think about, it could be addressed in a prenuptial agreement. And while no one wants to prepare for a divorce before a marriage even happens, it’s better to address the issue up front instead of being surprised during the property division.
Source: Colorado Springs Gazette, “Money & the Law: Child’s divorce can complicate estate planning,” Jim Flynn, Nov. 25, 2012