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July 2025 Newsletter – Protecting Your Children’s Inheritance In The Event Of Divorce

Protecting Your Children’s Inheritance
In The Event Of Divorce

While your children eagerly plan their future with their fiancé, you do not desire to ruin the romance or upset their significant other by focusing on the possibility of divorce and the economic consequences it may have. However, in today’s society nearly fifty (50%) percent of first marriages end in divorce and it is prudent and in the best interest of all parties to be open and honest regarding the legal and financial consequences of severing such unions prior to his/her making. Divorce proceedings can often be a drawn out lengthy and expensive legal battle, some of which could be alleviated by the foresight of couples and their families discussing and agreeing upon financial matters prior to marriage. Parents should consider the financial implications their child’s divorce may have on any assets bequeathed to their child. During a divorce proceeding, a significant portion of your child’s inheritance may be granted to his/her divorcing spouse if the assets are not properly protected from equitable distribution. Establishing a trust or prenuptial agreement can offer your child such needed protection in the event of divorce.

Trusts
Under Pennsylvania law “marital property” is subject to equitable distribution during a divorce. Marital property is all property acquired by either spouse during the marriage and property is presumed to be owned jointly by both husband and wife. Equitable distribution allows the court to divide the marital property as it deems fair based on a number of factors, including, but not limited to, the length of the marriage, the parties’ incomes and ability to earn, the standard of living during the marriage and whether either spouse will be the custodial parent of any minor children of the marriage.

However, there are exclusions to “marital property” under Pennsylvania law. One such exclusion to the definition of marital property subject to equitable distribution is any property acquired by gift, bequest, devise or descent or property acquired in exchange for such property. This means that originally gifts or bequests given to a child are excluded from the definition of marital property subject to equitable distribution in the event of divorce. While this may give parents a pause for relief to believe their gifts or bequests to their children are protected from equitable distribution, that relief is misguided depending on whether by their child’s use of the gift or bequest it becomes marital property. Pennsylvania courts have found that if these excluded funds become comingled with marital funds then they lose their exempt status. Thus, if inherited assets are used to purchase a home jointly with a spouse, the entire asset then becomes marital property subject to equitable distribution. For example, if a daughter received a large inheritance from her parents and placed it in her sole personal account, this inheritance would be property excluded from the definition of marital property. However, if the daughter then uses the same inheritance to purchase a home jointly with her husband, the home would be considered martial property and subject to equitable distribution.

Additionally, if there is any increase in value of the excluded property during the marriage then that increase in value is martial property and subject to equitable distribution. For example, if a daughter inherits real property from her mother valued at $250,000.00, that property is excluded from equitable distribution. If that property then increases in value during the course of the marriage and is valued at $400,000.00 on the date of separation, the $150,000.00 increase in value would be considered marital property and subject to equitable distribution. One option to help protect against the co-mingling of funds and increase in value of property bequeathed and received during marriage from equitable distribution marital property rules, is for parents to establish a trust for their children. The principal of a trust is viewed as a gift and is excluded property. Additionally, in creating a trust a parent can limit a child’s access to the principal. The Pennsylvania Supreme Court in Solomon vs. Solomon, 531 Pa. 113, (1992) has ruled that if a child does not obtain ownership and control over the principal of the trust prior to the date of separation, any increase in value of the trust will not be considered marital property and subject to equitable division.

Consider this example. A married daughter at age 31 becomes the beneficiary of a trust with $1,000,000.00 of principal assets. Under the terms of the trust the child can only withdraw: (i) ten (10%) percent of the principal at the later of her father’s death or age 35; and (ii) fifteen (15%) percent of the remaining principal every 5 years thereafter. The same child then gets divorced at the age of 38, none of the trust principal has been withdrawn and the value of the trust has increased in value by $200,000.00. Since at the age of 38 the child only has the right to ten (10%) of the principal of the trust, only ten (10%) of the increase of value of the trust will be considered marital property, e.g. instead of $200,000.00 now being marital property subject to equitable division, only $20,000.00 is marital property. Additionally, since the child only had limited access to the principal assets of the trust during the marriage, at most the child could have only co-mingled $100,000 of the trust principal, preserving the $900,000 remainder, plus appreciation, as excluded property from equitable distribution.

Prenuptial Agreements
For their protection, children with the potential of receiving substantial inheritance should also consider entering into agreements prior to marriage regarding the division of their assets and the rate of spousal support in the event of divorce. Without these agreements, courts may divide inherited property upon divorce and a child could end up losing fifty (50%) percent of the assets she has inherited from her parents. These types of agreements are commonly known as prenuptial agreements or premarital agreements. A prenuptial agreement allows for a husband and wife prior to marriage to plan ahead to protect their assets and amicably agree on the division of marital property if divorce was to occur. A prenuptial agreement also allows couples to agree to exclude any increase in value of premarital assets from the definition of marital property subject to equitable distribution, if so desired.

At one time, prenuptial agreements were discouraged by Pennsylvania Courts. However, they are now presumed valid and binding and are governed by section 3106 of the Pennsylvania Divorce Code. Under the Divorce Code, premarital agreements will only be set aside by the courts if it is shown that:

  1. the party did not execute the agreement voluntarily, or;
  2. the party, before the execution of the agreement:
    1. was not provided a fair and reasonable disclosure of the property or financial obligations of the other party;
    2. did not voluntarily and expressly waive, in writing, any right to disclosure of the property or financial obligations of the other party beyond the disclosure provided, and;
    3. did not have adequate knowledge of the property or financial obligations of the other party.

Basically, this means prenuptial agreements will be enforced as long as the parties disclose their financial assets (wealth) and obligations (debts) to each other prior to signing the agreement. This requirement allows both spouses to have a knowledge and understanding of the other’s financial status before they knowingly waive any right to possible marital assets and encourages openness and honesty in negotiating these agreements. With a fifty (50%) percent likelihood of divorce, all couples should discuss and consider prenuptial agreements to protect their current and future assets in the event of divorce.

Often times, couples and their families fail to take action to protect their assets in the event of divorce. It is necessary to take precautionary steps and draft prenuptial agreements or trust documents designed to protect your children’s inheritance, otherwise any assets given or bequeathed to your children could be co-mingled or increase in value to the point where a significant amount of your child’s inheritance would be given to their former spouse in the event of divorce.

If you have any questions or concerns about how marriage and divorce can affect your assets or any gift or bequest to your children and what steps are available to protect those assets please contact us.