How can I protect my child’s inheritance from a family law claim?

When parents are passing on their wealth to the next generation, they are often concerned that it may be claimed by their child’s spouse in a family law dispute. By Binay Prasad, Senior Associate and Accredited Specialist (Wills & Estates).

How does the Family Court treat inheritance?

Generally speaking, when a married couple separates, all of the assets of the relationship (including an inheritance) will form part of an ‘asset pool’. The Family Court has powers to divide this asset pool between the separating couple. The same laws equally apply to de facto couples (subject to certain requirements).

However, your child’s spouse will not automatically receive part or all of your child’s inheritance in a family law claim. The Family Court will assess a range of factors when deciding whether the spouse should have access to the inheritance. These factors include the length of the marriage, the contributions (both financial and non-financial) made by each party to the marriage, the size of the other assets of the marriage, the circumstances of any minor children, and the future needs of each party.

How can I prevent a Family Law claim against my child's inheritance?

There are steps that you or your child can take to make it more difficult for your child’s spouse to make a family law claim against an inheritance.

Binding Financial Agreement

Your child and their spouse can enter into a Binding Financial Agreement ("BFA"), either during their marriage or after separation. This agreement will set out how assets (including an inheritance) are to be divided between the couple, in the event of separation. Provided the BFA is properly drafted and executed in accordance with the Family Law Act, this can be an effective method to protect an inheritance. However, a BFA can be set aside in certain circumstances, particularly if there has been a material change in circumstances since the BFA was executed (eg, the birth of a child). Furthermore, a BFA will obviously require the co-operation of your child’s spouse.

Testamentary Trust Will

You can execute a Will which incorporates ‘testamentary trusts’. In summary, this will mean that upon your death, rather than your assets passing into your child’s direct name, the assets will pass into a trust, for the benefit of your child. The trust will be controlled by a trustee, and the trust will typically have a range of beneficiaries including your child, their children and other family members. The trustee would then allocate income and capital to the beneficiaries of the trust, at the trustee’s discretion. Testamentary trusts can be drafted with a varying degree of flexibility, depending on your and your child’s circumstances. For example:

  • More flexible: The trust can be optional (at your child’s discretion), and can appoint your child as the trustee. This will give your child the most flexibility and control over their inheritance, and will allow your child to distribute income and capital to the beneficiaries of the trust (including themselves) at their discretion.  A flexible testamentary trust can provide significant tax planning benefits for your child. However, as discussed below, a flexible trust could be more vulnerable to a family law claim.
  • Less flexible: The trust could be mandatory, and/or could be controlled by an independent trustee (eg another family member, or aprofessional trustee). As your child would have little or no control over the inheritance in the trust, it would be less likely that the Family Court would regard the inheritance as your child’s asset for family law purposes. This could make it more difficult for your child’s spouse to claim the inheritance in a family law claim. The disadvantage of a less flexible trust is that your child will have little or no control over their inheritance, and there may be less tax planning benefits.

Generally speaking, the less control a child has over their trust, the less likely their spouse will be able to claim the trust assets in a family law dispute. However, even if the Family Court finds that the inheritance in the trust is not an asset available for division, the Court can still regard the inheritance as a ‘financial resource’ of your child. The Court may then award your child’s spouse a greater share of the non-inheritance assets of the relationship, to ensure that the spouse is adequately provided for.

How can Sharrock Pitman Legal help me?

The Family Court has far reaching powers when dividing property (including an inheritance) between separating spouses. Expert legal advice is essential in order to reduce or eliminate the risk of a successful family law claim against an inheritance.

At Sharrock Pitman Legal, we have an Accredited Specialist in Wills and Estates Law. Call our Wills and Estates team on 1300 205 506 today if you require assistance.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

For further information contact  
Binay Prasad

Binay Prasad is a Senior Associate of Sharrock Pitman Legal and an Accredited Specialist in Wills and Estates law.

Binay has over 10 years of experience in the field of wills and estates and has a particular interest in complex estates involving business, family trusts, and SMSFs. Binay also has experience in family law, which complements his wills and estates practice. For further information, contact Binay on his direct line (03) 8561 3329.

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