Most real estate investors don’t realize their children’s inheritance can be wiped out by a divorce — here’s how irrevocable trusts and LLCs stop that from happening in California. ?
Stephen Morris sits down with Ashton Asher of the Asher Law Group to break down the exact structures that keep inherited rental property out of reach of a child’s future spouse or creditors — including the “management time” commingling trap almost no one talks about.
? Chapters:
[00:00] Welcome & What We’re Covering
[00:25] Why Protecting Kids’ Inheritance Is the #1 Concern
[01:18] Why Leaving Assets Outright to Children Doesn’t Work
[01:47] How Inheritance Trusts for Children Work
[02:12] Asset Protection Realities in California
[02:31] Horror Stories: Rental Income & Divorce
[04:13] Community Property, Commingling & Separate Property in California
[05:26] The “Management Time” Trap & How to Counter It
[06:20] The LLC + Irrevocable Trust Structure for Rental Properties
[06:36] Paying Mortgage With Community Income: The Commingling Problem
[07:26] The Pre-Marriage Appraisal Strategy
[07:51] Final Takeaways & How to Get Help
Whether you own rental properties, commercial real estate, or family assets you’ve built over generations, one divorce can undo everything — unless you plan ahead with the right structure.
TRANSCRIPT:
[00:00] Hello. Hello. Hello. Welcome back. Stefan Morris here with advisory. [00:03] And today, have Ashton Asher with the Asher Law Group, and we're gonna talk less about tax today. We're gonna talk more about asset protection, specifically as you're planning to eventually give your assets to your kids during life or upon death. What are the considerations around it? What are some of the interesting areas and topics in terms of best practices as well? What are the things we wanna take a look at? [00:25] So with that in mind, Akshay, why don't you give us a little bit of what we're gonna be talking about here today? So much. You know, years ago, was told that I have the looks for radio. So I tried my luck with having a four program series on a radio station, and we talked about probate on one session, and you know, some people called. We talked about estate taxes, and few people called. [00:50] Then I got into how to protect your children's inheritance if they get divorced or sued. And I kid you not, the lines were lit up for the and I heard that once we got off the program, it was still people were still calling and Wow. About that issue. So Sure. Very quickly, I realized that people may be concerned about a lot of things, but they're particularly concerned about their children getting divorced or even sued, but to a lesser extent in the future. [01:18] Sure. And so the old method of leaving inheritance to children at certain ages or in certain increments doesn't work. Okay. Because the moment your children acquire the asset in their name, it's like anything else that they have and it's subject to being commingled with their spouses and creditor claims and so forth. So, what we do at Osher Law Group usually is to create trust structures that go on forever, essentially. [01:47] And rather than having the children get inheritance in their name, each child would have a trust that's created for them upon death. Yep. And their inheritance goes into that trust, and you specify at what age they get to control that trust. And with careful drafting and administration, that affords incredible protection. It makes it more difficult to get commingled. [02:12] In California, especially, asset protection is very difficult to accomplish. Sure. When we create a trust for ourselves, my trust or your trust, it doesn't protect us from lawsuit. Yeah. But California law does allow a trust to be protected if it was created by someone else for them. [02:31] And so with careful planning, we can protect your children for life, and yet they can still have pretty good control over their inheritance. So what's like a maybe give us a horror story on how this happens. Are we talking about the family home that's been in the family for a couple generations? It goes down to one of the children, and they get divorced. Have you seen a situation where spouse got the home in the divorce? [02:57] I've seen a situation where the spouse got a portion of the home. For sure. Oftentimes with rental properties, the spouse tries to attach the income from those rental properties and say that's community property, and investments as well. Also, let's face it. Our children sometimes make mistake. [03:18] They're in love Yeah. And they don't think about the future. And by once they get the asset in their name, sometimes they get pressured into having assets into both of their names and sometimes they just do it out of a show of love and affection. Sure. And that's it. [03:34] It's the protection is lost. But when it's locked up in a trust, the child can't do it. And the child can say, you know, honey, I love you. I would have done it, but my parents did this. I can't do I trust the trust locked me up. [03:48] Yeah. Yeah. And it it gives an escape valve for your child. Yep. And more importantly, as a matter of law, it makes most of it unreachable by credit. [03:58] Great. I'm not saying it's a 100 thing, but it it is the best we can accomplish in California. Let's you brought up an interesting point about commingling the assets. And if you're and especially as it relates to community property states. Not all 50 states are community property. [04:13] California is one of them. We have Arizona. We have a few other examples of community property states. Let's talk a little bit about what that is and especially as it relates to this asset protection here, how can a situation like any community property state where you're earning income taint or or otherwise bring in these separate assets into the community? Well, simplest form is just retitling assets into community property. [04:38] Sure. Also, from the moment you're married, your time is a community asset. Yep. People forget about that. So if one person is going to work and the other person is lying on the couch and having bonbons and watching, reality shows, it doesn't matter. [04:56] The one that's going to work, their time is community property, their income is community property. So oftentimes, you get community property interest created by management. So I frequently advise my younger clients that if you have separate property, rental property, let's say, and it requires a lot of time for management, Either do two things. If at all possible, hire a property manager. Pay them so that you can say, you know what? [05:26] I didn't spend my time managing the property. The community isn't acquiring. Or if you are gonna there's no choice around it. You have to manage it. Get paid for your management service. [05:37] Uh-huh. And that is community property. There's no way around that. But in the event of divorce, at least there's an argument that you got paid for your management services. Those payments were reasonable and consistent with somebody else. [05:53] This is compensation. And this way, we at least have an argument that it wasn't coming. So maybe we have a structure set up where all the separate property that you own, all these different real estate holdings are generating income or paying a management fee maybe to your s corp or something along those lines, and then that income is gonna be community property. Right. Whereas you've insulated or at least put a barrier between the actual rental income itself and the prop and and the property management income. [06:20] But without doubt, the best structure is to have the properties in LLCs. The LLCs owned by irrevocable trust for your children. Yep. And now we've built multiple layers of protection. If at all possible, hire a property manager and protect your children's inheritance. [06:36] So you have a home that you maybe owned prior to being married. And you get married, you gotta pay the mortgage. Pay with your salary that you're earning. What happens there? That's commingle. [06:53] That's a tough one to get around. Yeah. A law professor once told me that think about your separate property like a glass of milk and your community property like a Hershey's bottle of chocolate. And you start squeezing a few drops of chocolate into your milk. At the beginning, you can see the white milk and the chocolate on top. [07:11] But the more you start dropping in there Mhmm. After a while, it just becomes a light brown mess, and you can't tell the difference between the milk and the chocolate anymore. And that's kind of the same thing. That's a tough thing to get around. It becomes community property gradually. [07:26] But in those cases, when you don't have a prenup, what I advise my clients is to get an appraisal of the property before you got married. So that if something happens and you're splitting up, you can have evidence of what the property was worth when you got into the marriage. And worst case scenario, you have commingled the appreciation. It makes perfect sense. So I hope this was enlightening for you guys here, especially as it relates to asset protection. [07:51] I believe this is an area of law that is very poorly understood by the general public. And without some proper planning and consideration, you can find that your assets are actually gonna have an outcome, an ownership outcome that is a little bit different than what you were planning for. So if you're trying to get some asset protection, if you're trying to plan for your assets to not have an outcome like this, then you can feel free to reach out to us over here, and and we'll be more than happy to assist you as it relates to asset planning, asset protection, and making sure that your assets are going to the right place that you've always intended to. Thank you so much for watching, and look forward to seeing you on our next video. So make sure to like and subscribe to our channel for all the content related to real estate investment and tax saving strategies.
