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Protecting an Inheritance from Family Law Proceedings

An oft touted statistic is that 1 in 3 marriages will end in divorce.  

While this is a difficult time for the spouses involved, it also can wreak havoc on the estate planning of other members of the family, as an inheritance or the expectation of an inheritance can have a significant impact on the division of matrimonial property between divorcing spouses.

How the Court characterises the inheritance may play a significant part in determining property orders.

If the inheritance is characterised as being an asset of the marriage (thereby becoming part of the matrimonial property pool), then the inheritance is able to be divided between the parties in a manner the court deems just and equitable.

However, if the inheritance is characterised as being a financial resource, it cannot be divided between the parties.  Instead, the Court must consider whether or not there needs to be a “loading” to the other party of the property available for division in order to make the orders “just and equitable”.

The use of Testamentary Trusts to protect assets from Family Law Proceedings

The separation of the legal and beneficial ownership in a trust often makes a trust an attractive vehicle when it comes to asset protection.  However, can a beneficiary’s inheritance always be protected from Family Law claims?

Simply put… not entirely.  However, an effective testamentary trust increases the likelihood of the inheritance being characterised as being a financial resource, thereby preventing the inheritance from being divided. 

Whether the Court will characterise an interest in a testamentary trust as being a financial resource turns on the facts of each case.  Generally, the courts will have regard to the degree of control the spouse exercises over the trust.  For example, in circumstance where the spouse is the trustee and the only recipient of distributions from the trust has been the spouse, then the court is more likely to “bust the trust” and consider it an asset of the relationship.

If there is a degree of independence in the control of the trust, then the court is more likely to treat it as a financial resource.

A recent case in Queensland highlights the use of a testamentary trust to prevent assets of an Estate from being an asset of the marriage.

In GAU –v- GAV [2014] QCA 308, the Court was asked to alter the Will of an elderly lady after she lost capacity due to Alzheimer’s disease.  Her Will was made in 2008.  The Will was largely standard and provided that her Estate would be left to her husband and her children.  There were some specific gifts to her son’s wife at the time and the Estate itself was sizeable.

In 2014 her son separated from his wife.

The Testator’s husband applied to the Court for a codicil to be inserted into the Testator’s Will for the creation of a testamentary trust and to remove specific gifts of jewellery to the son’s now estranged wife.

The purpose of the trust was to ensure that the son did not directly receive the benefit of any inheritance to him which may in turn have been considered an asset of the marriage.

The ex-wife objected to the amendments, originally on the basis that the sole purpose of the application was to defeat Family Law proceedings.

On appeal, the court decided that, while the amendments may impact on the Family Law Proceedings, the amendments sought to be made to the Will were changes that the Testator would have made at the time, had she had capacity.  All evidence suggests that the Testator was quite adamant that family money should remain in the family.  Accordingly, the court found that it was likely that she would have taken this step had she had capacity to do so.

The question then became whether the son’s expected inheritance is considered a financial resource or an asset of the marriage.  However, that was a question for the Family Court to answer and irrelevant to this proceeding.  If deemed a financial resource, the wife would not be entitled to a share of the expected inheritance.

Accordingly, a testamentary trust can be an effective tool in protecting inheritances in the event of divorce.  This may arise in circumstances where parents are loathe to leave property to one child which may then be claimed by a spouse in family law proceedings.

If protecting an inheritance from Family Law proceedings is of concern to you, effective estate planning may be pivotal in minimising your exposure and you should discuss your concerns with an experienced Wills and Estates Lawyer.

 

 

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