Are your worried about how to protect your child’s inheritance from future divorce or relationship breakdown? You are not alone. Many parents share this concern, especially when they have worked hard to build financial security for themselves and their family.
Understanding the Challenge
For many young Australians, saving a deposit for a home is harder than ever. In contrast, parents are often in a stronger financial position and may wish to provide support to their children earlier, when they need it most. This might be helping with a home deposit, contributing to mortgage repayments, or offering financial assistance while their children are raising families of their own. With this support, it is reasonable to seek assurance that your contribution will stay with your child, even if their relationship changes in the future. Because relationship breakdowns are unfortunately common, more parents are taking steps to ensure their hard-earned wealth remains within the family and is protected from former partner disputes.
Planning with Confidence
There are practical, proactive ways to safeguard your child’s inheritance. With the right guidance, you can structure gifts or early inheritance in a way that supports your child’s goals whilst also protecting your family’s long-term wealth.
Tips to protect your wealth
The following tips can help protect your wealth from your child’s future spouse/partner:
- Ensure your child signs a prenup – a binding financial agreement (BFA), otherwise known as a “prenuptial agreement” is a legal document signed by couples either before or during marriage or living together in a de facto relationship. It sets out the way some or all of a couple’s assets, superannuation, gifts, inheritances and potential debts will be divided in the event that their relationship breaks down. As such it can prevent arguments around the splitting of assets and can also help save time and money when a couple separates. For example, a BFA could provide that any inheritance received during the relationship would remain the property of the person who received it if a couple were to go their separate ways.
- Establish a testamentary trust – for those looking to provide an inheritance to their children after their death, setting up a testamentary trust is another option to consider. A testamentary trust is a trust created by a will that does not come into force until the death of the will maker. Rather than providing an inheritance outright, assets are transferred into a trust and held on behalf of an individual or group of beneficiaries. As such, your child’s inheritance will remain in the legal hands of a trust and therefore be less likely to be claimed by their spouse/partner if their relationship breaks down.
- Sign a written loan agreement if helping children buys a home – another option is for parents to give the money under a properly documented loan agreement to ensure that they could be paid back should anything go wrong. Parents can either register the loan as a mortgage or as a caveat against the title of the property. The benefit of this is that the loan must ultimately be repaid and is a liability that reduces the total assets that are available for division in the financial settlement if the couple separates. However, this could limit your child’s borrowing capacity with a lender.
- Tenants in common – another option is for your child to purchase their property as tenants in common with their spouse/partner so the title is held in proportion to their contributions to the purchase cost. This is different to buying a property as joint owners (or ‘joint tenants’) as tenants in common ownership does not have to be a 50/50 split. Instead, the percentages could reflect each party’s contribution to the property. It also means that when one of the owners passes away, their share is subject to their will rather than going directly to the other owner. Although this ownership structure may be beneficial from an asset protection viewpoint, there are other pros and cons that must be considered.
Seek legal advice
If you’re thinking about helping your children out, make sure you seek professional legal advice from an expert who specialises in estate planning or family law to help protect your assets from others. It may come at a higher cost now, but it will be worth it and work out cheaper in the long run if the relationship goes awry.