The rising cost of living, concerns with inheritance tax and the challenges facing younger generations have led to more and more families gifting inheritances sooner rather than later.
Also, with people living longer there is a growing desire by parents (and grandparents) to transfer part of their wealth while they are still alive and at a time when it is needed most.
According to statistics, early inheritances typically go towards buying a new home, paying for private school education, starting a new business or providing a much-needed buffer for young people in our current tough economic climate.
Advocates for this growing trend claim it enables parents to know how their bequests will be used and puts them in a powerful position to offer advice. It is also a satisfying way to support children and help ease the financial transition between generations.
But how should family members and the recipients themselves safeguard these early bequests and avoid litigation in the event of divorce or a relationship breakdown in the future?
Here are our top recommendations:
1. Binding Financial Agreement (BFA)
One of the most effective tools for protecting and defending an inheritance from a future family law claim, is to have your child enter into a binding financial agreement with their spouse or partner.
Sometimes referred to as a ‘prenup’, BFAs are legally binding documents that can outline how assets, including an inheritance, will be divided in the event of a relationship breakdown.
These agreements are available to both married and de facto couples and can be entered into before or during a relationship or once a relationship has ceased. They also do not necessarily need to cover the couple’s entire pool of assets and can deal with assets selectively for a particular purpose such as preserving an inheritance.
For BFAs to be enforceable:
• Both parties must obtain independent legal advice.
• The agreement must be in writing and signed by both parties.
2. Loans or Gifts
In conjunction with a BFA, entering into a legally binding loan agreement, identifying the funds transferred as a loan rather than a gift, may add another layer of protection.
Rather than gifting an early inheritance outright, consider structuring it as a loan. This can be documented with a loan agreement, stating repayment terms. In the event of a marriage breakdown, the loan remains a liability to be repaid, whereas a gift is often simply absorbed into the asset pool to be divided.
3. Combination of Loan Agreement and BFA
By far the best approach to protecting an early inheritance is the combination of a loan agreement and a binding financial agreement. A loan agreement clearly documents the terms of the loan, including repayment terms, while a BFA outlines how assets, including the funds lent, will be handled in the event of a relationship breakdown.
The major benefits of combining a loan agreement with a BFA include clear documentation of the financial arrangement and legal protection for the inheritance. This approach ensures that the inheritance is treated as a loan to be repaid and is protected by a legally binding agreement in case of a relationship breakdown.
Once you’ve decided on your preferred approach, don’t forget to regularly review and update estate plans and financial agreements to reflect changes in relationships or financial circumstances. Communicate your intentions with family members to avoid disputes.
By utilising these strategies, you can help ensure that your child or grandchild’s inheritance is protected in the event of a relationship breakdown.
How We Can Help
At Resolve Family Conflict, we will draft the appropriate documents and provide advice tailored to your specific circumstances.
To get in touch: Catherine Gale cgale@resolveconflict.com.au
Resolve Conflict
Level 24, 459 Collins Street
Melbourne, VIC 3000