Planning for wealth transfers to future generations is a tricky business. Attorneys counsel clients on the dangers of vesting too much wealth in a beneficiary who is too young to understand the responsibility that comes with such an inheritance. Typically, an attorney will recommend the use of a trust that restricts the distribution of the wealth until a child reaches a more “mature” age—often including staged distributions (e.g., 1/3 at 25, 30 and 35). A “staged distribution” trust allows the client to delay and/or spread out the receipt of an inheritance and to allow a trustee to manage those assets for an “immature” child.
While staged distribution trusts work well to accomplish the goal of protecting wealth for a young beneficiary, they do little to protect inherited wealth in the case of the beneficiary’s future divorce. In many states, including New Jersey, inherited assets are not generally subject to equitable distribution so long as they remain in the inheritor’s sole name and control. See N.J.S.A. §2A:34-23(h). But once distributed from a trust, they may be inadvertently or intentionally (without due consideration of the risks) comingled with marital assets, thereby placing those assets within reach of a claim for equitable distribution by a potential ex-spouse. Even if inherited assets are kept separate and apart from marital assets, they may nevertheless be considered as a resource for alimony and child support purposes, with respect to both the requirement to pay and the right to receive, and they may impact the manner in which marital assets are divided in a divorce. See N.J.S.A. §§2A:34-23 and 23.1.