Can Inherited Assets be Seized in a Divorce?

Shocking to most people, your retirement accounts can be seized once they pass to your loved ones. During your lifetime, your retirement funds have asset protection, meaning they can’t be taken in a lawsuit. Unfortunately, as soon as retirement accounts are inherited, the protection evaporates. This means your hard earned money can legally be snatched by strangers and the courts.

One example is a divorce creditor. Many parents are concerned that their in-laws may someday become the outlaws; they may someday get divorced and inherited assets can be seized by a divorcing spouse.

Here’s the story of Mary and Tom – which outcome would you prefer for your children?

Option 1:

Mary and Tom love their son-in-law, Mike, and think his marriage to their daughter Liz will last. They gave Liz her share of their retirement plans outright at their deaths. Due to the new laws governing inherited retirement accounts, Liz was required to withdraw all of the retirement account assets within ten years, and these assets were put in the joint marital investment account. Shortly thereafter, Liz and Mike divorced and Mike was able to take 50% of Liz’s inherited retirement funds.

Option 2:

Mary and Tom love their son-in-law, Mike, but recognize that 50% of all couples end up in divorce. It’s an unfortunate reality, so when they did their estate planning, they provided for their children, but made sure the inheritances couldn’t be taken from them. Instead of outright distributions, they passed their retirement plans in trust. Five years later, Liz and Mike divorced and Mike was not able to take any of Liz’s inheritance.

As estate planning attorneys, we constantly look for ways to protect our clients as well as their loved ones and assets. That’s why we suggest we have a conversation about your retirement accounts and together determine whether a retirement trust would make sense for you.