During a divorce, it’s likely that the family’s assets will be divided between the parties involved – this could include savings, the house, superannuation, business interests, cars and other material possessions.
But did you know that an inheritance received before or during the relationship (and maybe even after it has ended) could also be included as an asset available for distribution?
Here are some options to consider how to protect your inheritance during divorce and/or separation.
How to Protect Your Inheritance During Divorce
The simplest option to protect your inheritance during divorce and/or separation is to enter into a “prenuptial agreement”. These are called Binding Financial Agreements and can be done before marriage (or a de facto relationship), during the relationship or, even, after it has ended.
This option requires the consent of both parties (and the involvement of independent lawyers) and there must be no suggestion that either party was coerced or tricked into signing the agreement.
If you know you’ll potentially receive a large inheritance at some point, you may want to consider protecting that with one of these agreements which would exclude any inheritance if you separated.
Loan Instead Of Gift
Financial gifts from parents to their children could be considered as part of the pool of assets of the marriage/relationship.
By providing financial support by a loan instead of a gift could mean that the money does not necessarily become part of the asset pool in the event of a relationship breakdown. This money would become re-payable to the lender.
This would usually require a formal loan agreement properly drawn up and signed by all parties. Commercial conditions need to be in place to prove it is a loan and not a gift. This could include a date for repayment and a fair interest rate. It’s best to speak to a financial adviser and/or lawyer about the best ways to achieve this.
A testamentary trust may be an effective way to protect an inheritance during a divorce.
A testamentary trust allows the inheritance to be held in a trust controlled by an appointed trustee. This is called a protective testamentary trust and the beneficiary does not have the option to appoint or remove trustees.
A discretionary testamentary trust is another kind of trust that allows the beneficiary to appoint themselves to manage the trust and therefore access it as and when they wish.
All assets from the inheritance are held in a trust and may, therefore, be protected from claims by the beneficiary’s spouse during a marital breakdown.
Legal advice is absolutely required for these arrangements.
Speak to a specialist estate planner and lawyer to find out more about how this could help you protect your inheritance during your divorce.
Update Your Will
Making sure your will and your parents’ wills are up to date can help ensure that any inheritances given or received are protected from any future relationship breakdowns.
As a parent, you can protect your inheritance to be passed on to your children from any future spouses that may lay a claim to it in the event of a divorce.
By having a clear will that expresses your wishes, it helps to establish who gets what in the future. Hand in hand with a testamentary trust, this may be the best way to protect your assets.
Mediate, Don’t Litigate
Even where you have made all the arrangements you think are necessary to protect yourself from claims against an inheritance or financial gift you may still end up having to resolve claims by ex-spouses. And the best way to do that is by family mediation, not spending hard-earned money and lots of time having legal arguments in the Family Court.