Estate Planning Challenges With Inheritances in Colorado

Estate planning lawyers in Colorado face a special challenge when they represent a set of parents whose children divorce.  Those parents may not want their hard earned wealth to end up in the hands of a former daughter-in-law or son-in-law.  Since property received by inheritance is separate property, the ex daughter-in-law or son-in-law does not have a claim to that inheritance.  However, any appreciation in the value of an inheritance after it is received is considered marital property and Colorado law dictates that judges divide marital property in an equitable manner between the two divorcing parties.  

One way for parents to help prevent their money from going to a child’s ex-spouse is to use a trust instead of an outright inheritance.  A trust can facilitate gradual transfers of wealth to their child as opposed to a lump sum at death, and this lessens appreciation.  

A 2001 Colorado Supreme Court decision threatens this maneuver though because it held that a wife had acquired a vested property interest in a trust set up by her parents at the time she was named beneficiary of the trust even though she didn’t receive any money at that time.  

To get around this decision, parents should use trusts that have independent trustees with wide discretion and that designate grandchildren as the recipients of the trust’s remaining assets after the children have died.  This setup weakens the argument that the child received an inheritance at the time the child was first named as beneficiary of the trust.  The child can then take the position that he or she only had a mere expectancy right as opposed to a property right.  

See Jim Flynn, Money & The Law: Child’s Divorce Can Complicate Estate Planning, Colorado Springs Gazette, Nov. 25, 2012. 

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.