Protecting inheritances from being lost in family law proceedings

What to do to ensure any gifts you leave your children are protected

Our estate planning clients often ask what can be done to ensure that if they leave an inheritance to their children under their will, that inheritance can be preserved by their child in the event the adult child later goes through a family law settlement.

It is very common that parents wish for their children to inherit their assets, and the idea that their child may not have the benefit of their assets due to the adult child losing the assets in a family law settlement can be very upsetting and against their wishes.

As a general rule, in family law proceedings in Australia, all assets and liabilities existing at the date of the Orders being made will form part of their property pool to be divided between the parties. This includes inheritances received by one or both of the parties to the marriage or de facto relationship – up to and including the date of the Orders being made. There are exceptions to this general rule, however, our estate planning clients are often surprised by how limited these exceptions are.

The most powerful and practical way to ensure an inheritance you wish to leave your child is protected from being lost or divided up in family law proceedings is by the creation of a testamentary trust. This is a trust which comes into effect upon the death of the testator, and which holds the assets separately to the intended beneficiary (or beneficiaries).

The trustee of the trust will make distributions to the child (a beneficiary under the trust) according to the terms of the trust deed – which can be very specific as to distributions to children and other beneficiaries or can allow the trustee a lot of flexibility and discretion when making distributions.

However, in order to establish a testamentary trust and ensure that the assets are protected from being lost in family law proceedings as intended, expert legal advice from an experienced Estate Planning lawyer is needed.

This is because the High Court of Australia and Family Court of Australia have set down a law which makes clear that simply establishing a testamentary trust is not enough to protect the trust assets from being included in a family law settlement. Who has control of the trust itself and the trust assets is of the greatest importance. This is the case even where neither of the parties to the marriage or de facto relationship is specified as beneficiaries under the trust.

Ensuring that any testamentary trust you establish will have the desired result of preserving your estate (or part of it) from being transferred to former spouses or former de facto partners in a family law settlement is something that Argent Law’s expert Estate Planning lawyers can assist you with at every step of the way, including:

  • Understanding how trusts work, including the roles and responsibilities of each of the people involved in the trust;
  • Choosing a settlor, trustee and legal personal representative (for when the trust comes into effect upon death);
  • Nominating beneficiaries;
  • Drafting the trust deed;
  • Establishing powers in the trust deed for changing the deed itself, and any of the classes of the people above if such a level of flexibility is desired;
  • Nominating a vesting date (at which the trust comes to an end);

If you would like to know more about how a testamentary trust can assist preserve your estate in future, so that your children (or other beneficiaries) can have the full benefit of any inheritance you leave them, please call Argent Law today on 03 9571 7444 to arrange a confidential appointment with Darby Nunan or Helen Adoranti from our Estate Planning Team.

Further, please note that if you require advice regarding the tax implications of a Testamentary Trust, James Patterson, (CPA), Director of Argent Accounting will be available to work with the Argent Law Estate Planning team to ensure your Testamentary Trust is both tax compliant and tax-efficient.

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