Adjunct Professor, Dr Brett Davies of Legal Consolidated Barristers and Solicitors, discusses a parent’s concern of losing their money when they die to an ex-child in law. Can it be stopped in the Will?
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Can you stop your child’s ex-spouse taking your money when you die, with a Divorce Protection Trust in your Will?
Your daughter-in-law knows you have money and that you are old. She tolerates living with your son a little longer. You die. She immediately leaves your son. She asks the Family Court for half of your son’s inheritance.
A Will can contain a number of useful trusts. They generally sit dormant in your Will until needed by your executors or beneficiaries:
1. 3-Generation Testamentary Trusts – to reduce Capital Gain Tax, Transfer duty (stamp duty) and income tax
2. Superannuation Testamentary Trusts – remove the 15% or 30% (plus Medicare) tax on your Superannuation when your Superannuation goes to adult children
3. Protective and Maintenance Trusts – in case your children, grandchildren or a beneficiary are under the Age of Majority
4. Bankruptcy Trusts – in case a beneficiary goes bankrupt
5. Divorce Protection Trusts – in case a beneficiary suffers from a split up from a spouse or de facto partner
How does the Divorce Protection Trust work in my Will?
The Divorce Protection Trust seeks to delay or stop any capital or income going to the beneficiary who is suffering from divorce or separation proceedings. It reduces the opportunity for the Family Court to get its hands on your money.
The Family Law Act gives the Family Court power over third parties. See the Federal Court case in the West Point collapse.
However, in a divorce, the Family Court looks at how the assets came to be in a trust. It considers who gave the money to the trust in the first place.
If assets come from one of the couple during the relationship and are then put into a trust, the assets are considered part of the marriage. The Court is free to order that the assets in the trust be transferred to your in-law.
However, this may not apply where the money comes via a Will. Instead of your divorcing child putting money into a trust, it is you who is putting the money into the trust (via a Divorce Protection Trust). It is arguably different where the married person’s parents gift their assets into a Divorce Protection Trust.
When does the Divorce Protection Trust operate?
The Divorce Protection Trust sits dormant in your Will until needed. The Divorce Protection Trust activates for the benefit of the married person and that person’s children and grandchildren. (This is your divorcing child, then their children and their grandchildren). The assets in the Divorce Protection Trust is provided by the parents (being you), not the married person (e.g. your child). There is higher protection from the Family Court.
Your descendants (children, grandchildren and great-grandchildren) are beneficiaries of the Divorce Protection Trust but not owners of the assets.
What if a descendant controls the trust? This is where the descendant is the sole trustee or appointor. (This position of power controls the trust.) The Family Court states that the ‘controller’ is also the ‘owner’.
In these circumstances, a court may decide that it has the power to make an order affecting assets held by the trust. For example, the Court orders the transfer of the trust assets to the former spouse of the controller or to a trustee in bankruptcy.
However, the Divorce Protection Trust removes that person’s power to control the trust while they are suffering from the separation. This removes control.
The Divorce Protection Trust benefits the current and succeeding generations. This helps protect the assets from the Family Court.
Dr Brett Davies is the tax partner of the national practice Legal Consolidated Barristers and Solicitors. They are Australia’s only law firm providing legal documents online. Brett is Adjunct Professor at the Curtin Business & Law School where he lectures both the Estate Planning and Superannuation units. He also lectures at The University of Western Australia and has lectured at Western Sydney.
Brett gives back to the tax community. He has sat on the Tax Institutes’ national Education Committee. He has also sat on both the Law Society’s and Law Council’s Tax Committee. Brett has 7 degrees including 4 law degrees. He has both a Doctorate in tax law and an MBA. He is a co-author of Thomson Reuters’ Australian Financial Handbook. Contact Brett at brett@legalconsolidated.com
