All in the family

All in the family

The strategy To structure my children's inheritance so it won't end up with the in-laws.

Do I need to do that? With divorce rates showing no signs of declining, Ross Johnston, the head of dealer services with Australian Unity Financial Planning, says there's a growing interest in ensuring that any assets you leave to family members stay with them and can't be claimed if they get divorced.

Unfortunately, if offspring receive an inheritance in their own name, Johnston says it will generally form part of their assets, which means it's fair game if they subsequently go through a divorce.

It's not just relationship breakdowns that are at issue. Johnston says if a couple are unlucky enough to die at the same time - perhaps in an accident - there are laws that state which one of them is presumed to have died first.

If both bequeath their assets in the same way - usually by leaving them to their children - that's usually not a problem. But some people seek to protect their grandchildren if their son- or daughter-in-law, for example, has children from a previous marriage or has other beneficiaries.

OK, so what can I do? Johnston says trusts are the most effective way of giving your children the benefits of assets, without them actually owning them. They can receive income and other benefits from the trust, but the underlying assets can be protected and - if desired - even preserved for future generations.

You can either use a family trust, which is set up while you're still alive and can be useful in providing your children with benefits while you're still alive, or a testamentary trust which is part of your will.

If you use a testamentary trust, the specified assets are transferred to it when you die and it holds the assets for your beneficiaries.

Are they expensive to set up? It depends on how complex they are. Johnston says a basic testamentary trust can cost about $1000 to set up, but if you need specialist advice - which is advisable when you're dealing with Family Law - it can cost several times that. Whether the cost is justified depends on what the underlying assets are worth and to what extent you feel you need to protect them.

How does the trust work? It's a structure interposed between your children and the assets. It will have a trust deed, which sets out how the trust will be run, and one or more trustees, who administer the trust in line with the deed.

So how does that ensure my children's inheritance can't be claimed by a partner if they divorce? Johnston says there are no bullet-proof solutions, especially when it comes to family law. But there is quite a bit of case law that confirms assets held in trusts may not be deemed to be part of the marital property if the trust is structured properly.

He says you'll probably need advice from a specialist lawyer, but control is a key issue. It may be necessary to appoint an outsider - perhaps a trustee company or a friend or adviser - as trustee or co-trustee to administer the trust.

The terms of the trust deed will also need to be carefully drafted to ensure that, while your children can benefit from your assets, they can't be deemed to be in control or ownership of them.

Johnston says the Family Court has difficulty making orders on third parties which provides trusts with some degree of protection, but there have been cases where it has successfully made such orders in the past.