Protecting an Inheritance from Creditors or a Divorcing Spouse

Shannon K. Goodwin, J.D. – Principal Attorney Elville and Associates, P.C.

When thinking about an estate plan, one of the most common concerns of parents is whether the inheritance they are leaving for their child, grandchild, or other beneficiaries will be protected from creditors, namely from a beneficiary’s spouse in the event of a divorce.

Generally speaking, the answer is yes – an inheritance is protected from a divorcing spouse. In Maryland, property acquired prior to the marriage and property acquired by gift or inheritance during the marriage is considered separate property and is not subject to division in the event of a divorce. Thus, any inheritance left behind for your child or other beneficiary will remain that beneficiary’s property and will be protected from a divorcing spouse. There are multiple other states that share this viewpoint, including the local jurisdictions of Virginia and District of Columbia. However, as with everything else in the legal world, there are certain exceptions to this general rule.

As an added layer of protection, your child or other loved one may implement a pre-marital or post-marital agreement, commonly referred to as pre-nuptial and post-nuptial agreements. Provided that both spouses reach agreement, it can be made clear in writing that an inheritance will be the separate property of the inheriting spouse and will not be considered as part of the marital estate.  Although there are many nuances and legal considerations in these types of agreements, this can include future or expected inheritances from parents or other family members.

Turning to other creditors aside from a divorcing spouse (I.e. general creditors, bankruptcy creditors, accidents), a number of different estate planning tools can be used to protect an inheritance from potential claims.  One of the most common tools is to leave an inheritance in further trust for the benefit of beneficiary – whoever that beneficiary may be.  This kind of trust established at death is commonly referred to as a spendthrift irrevocable trust.  A trust such as this may be called by many names, including the term “legacy trust.”  This type of trust is an irrevocable trust established upon the death of the person leaving the inheritance (and can also be implemented as a lifetime trust). Rather than leaving the inheritance to the individual beneficiary outright, the inheritance is distributed into the legacy trust for the benefit of the child or other beneficiary.  The trust can be perpetual or for a shorter duration.

The next question most clients ask is “who is going to be in charge of the legacy trust’s assets, and will the child or other beneficiary be able to withdraw funds freely as they wish?”  In Maryland, the child or beneficiary can be the trustee of their own trust. However, if the primary beneficiary is also the sole trustee with full control over the trust’s assets, the assets are likely more vulnerable to the individual’s creditors.  In addressing this issue, limiting distributions to an ascertainable standard called a “HEMS” standard, where the trustee has the discretion to distribute assets for the beneficiary’s health, education, maintenance, and support, along with a careful review of design and flexibility measures, including tax considerations, and the ability for independent trustees to serve if needed, along with an understanding and analysis of the use of powers of appointment, is a good starting point.  Along these lines, a special fiduciary may be granted the power to appoint an independent trustee to control and manage the distributions of the trust.  While the trust would still be for the benefit of the child or beneficiary, they would no longer being in sole control of the trust assets, and may be provided a much greater level of protection from the beneficiary’s creditors.  It is also important to keep in mind that there are exception creditors in nearly all states (except Nevada), and these include IRS, claims for alimony, and child support claims.

If the child or other beneficiary is not able to appropriately manage finances or there is concern with the individual receiving a large sum of money all at once, a spendthrift provision contained within the trust can be used to help protect the inheritance from creditors. A spendthrift provision can be used to prevent creditors from being able to seek payment from the trust or attaching an interest on future distributions from the trust. Such a provision will also bar the beneficiary of the trust from assigning his or her future rights to distributions from the trust. In other words, the beneficiary cannot use the trust’s assets or future distributions from the trust to secure credit.

              These are just a few of the tools that can be used to achieve the common goal of providing a legacy for future generations and protecting generational wealth. This is intended as a basic overview of a few options, but I encourage you to come in for a consultation and further discuss your estate planning options with our firm.

Shannon Goodwin is a Principal Attorney at Elville and Associates, and is the Leader of the Firm’s busy Estate and Trust Administration Department.  She has quickly shown the scope and depth of her talents and abilities in the complex world of estates and trusts.  Through her guidance, she partners with clients as they address the sometimes-challenging matters of the administration of loved ones’ estates from start to finish, including helping navigate the probate process, inventory and reportings, accountings, and much more.  Shannon also represents clients in estate planning and elder law matters.

Shannon was named to the Maryland Rising Stars list in 2024 and 2025 and can be reached at sgoodwin@elvilleassociates.com, or 443-393-7696 x116.

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