Protecting your child’s inheritance from divorce

child's inheritance

If you’ve given your child an early inheritance or a large sum to help buy a property, you might be wondering what would become of it if they were to split up with their partner. Could any of the money (or the assets purchased with it) go to an estranged spouse? 

Even if you’re on great terms with your son or daughter in-law and believe your child’s relationship with them is built to last, it’s only natural to worry. Fortunately, there are legal steps you can take to help prevent the money you gifted your child from being eaten up by a divorce settlement.

Have your child and their spouse enter a financial agreement

One solution might be encouraging your child to enter a financial agreement with their partner. Often called a ‘prenup,’ this is a written document that lays out how certain assets will be divided in the event of a divorce. 

If drawn up correctly (and with the help of a family lawyer), a financial agreement might be able to block any claims to assets by ex-partners and keep your child from getting embroiled in a drawn out and stressful dispute before the court. It can be entered at any time before, during or at the end of a marriage or de facto relationship. 

Broaching the subject with your child might be stressful, and you could inadvertently put the idea in their head that you don’t trust their partner. But it’s important to remind them that no one knows what the future holds, and a financial agreement is just a tool to make sure your family is protected. 

Loan the money to your child instead of gifting it

Another option is to consider loaning your children the money instead of gifting it. Unlike a gift that’s given with no strings attached, a loan is unlikely to enter the pool of divisible assets in the event of a relationship breakdown (and it will also be largely safe from claims by creditors).

If you do go down this route, you’ll need a solicitor to draw up a Deed of Loan, which will outline details like amount, term, purpose, and whether or not any interest will be charged. Many parents choose to forgive the loan at a later date, either while they are alive or in their Will.

Think about establishing a testamentary trust

Finally, if you haven’t given your child their inheritance yet but want some form of assurance that it will stay in your family’s hands after you’re gone, it might be worth looking into a testamentary trust. This is a legal structure that gives your assets to a trustee to hold upon your death. It will then be up to them to distribute the assets to your beneficiaries according to your wishes. 

While a testamentary trust might not be an ironclad defence against divorce given the Family Court’s far-reaching powers, it can play a major role in quarantining your child’s inheritance from any claims by their partner.

Remarrying? These strategies might help 

You might want to consider one of the above strategies yourself if you’ve remarried and want to ensure a potential divorce doesn’t cost your children their inheritance. 

Divorce, whether it’s yours or your child’s, can throw the plans you have for your family’s future in disarray. If you’re thinking of implementing any of the above options, make sure all parties involved seek out legal and financial advice.