There are many legal strategies that can help to protect your child’s inheritance, some of which you can implement yourself, and others that you can recommend your child implement.
It is especially important to consider risks to inheritances in blended families.
Having a Will drawn up by a reputable estate planning lawyer is a simple way of ensuring your assets are distributed according to your wishes, although more complicated families will need to undertake further measures to protect inheritances.
With Australian Baby Boomers currently holding approximately $4.9 trillion in assets, and the rise of estate disputes due to the high value of many deceased estates, ensuring inheritances pass to younger generations with minimal fuss is imperative.
Legal Risks to Inheritance
There a many potential risks which could impact inheritances including:
- Estate disputes;
- Inheritances forming part of a marital asset pool to be divided after an adult child separates from their spouse; and
- Beneficiaries with gambling or money problems.
Estate disputes can arise where a Will maker or Testator has not made adequate provision for someone they have a moral obligation to provide for such as their spouse.
An eligible person can make a claim for provision from the estate. Under the Administration and Probate Act 1958, an eligible person may include a spouse or domestic partner of the deceased, a child, step-child or adopted child of the deceased, a former spouse if a family law property settlement has not been finalised, a grandchild and a member of the deceased’s household.
When the Court considers whether the deceased had a moral duty to provide for the claimant, they will consider the relationship between the claimant and the deceased, the claimant’s financial position and health status, and whether the deceased was supporting the claimant prior to their death.
Estate disputes are more likely to occur within blended families and where the deceased estate is worth more. 80% of estate claims come from immediate family members, 60% of those are brought by adult children and 20% from spouses or former spouses.
Estate disputes may also arise where a Will is invalid or non-existent. Only a person with an interest in a deceased estate may challenge a Will on the grounds of the Will’s validity.
If such proceedings are brought before the Court and the Court finds that the Will is invalid, the Court may grant probate for an earlier valid Will made by the deceased, or the deceased may be declared to have died intestate in which event no Will would apply and the deceased’s assets would be divided according to intestacy laws.
A Will can be deemed invalid for a number of reasons, most commonly where it has not been signed or witnessed correctly, or where the deceased did not have capacity to make a Will at the time the Will was made, for example if they were suffering from dementia.
Property settlements due to separation and divorce can often impact inheritances. When parties to a marriage or de facto relationship separate without a binding financial agreement in place, inheritances can be up for division along with all other assets in the matrimonial asset pool. Even if one party has not yet received the inheritance but is likely to in the near future, the inheritance can still be considered by the Court.
A further problem for inheritances may actually lie with the beneficiary themselves. For beneficiaries with drug, gambling, or money management problems, receiving a large lump sum inheritance may further fuel these existing issues, and may be wasted.
Many Will makers seek to protect beneficiaries from themselves by creating a testamentary trust to ration out funds under supervision of a trustee instead of leaving a lump sum to the beneficiary.
Legal Tools for Protection
One vital step in ensuring your assets are distributed according to your wishes is to a see a reputable estate planning lawyer and have them draft your Will.
DIY Wills can be problematic especially where large estates and blended families are concerned.
Meeting with an estate planning lawyer to discuss matters such as your family dynamic, the size and makeup of your estate and your wishes is vital to ensure the best possible Will is created for your personal circumstances to avoid potential disputes.
A lawyer will also ensure a Will is executed formally and all legal requirements are adhered to, ensuring the validity of the Will.
Further, writing a letter of wishes to be read alongside your Will can be a useful tool to help your beneficiaries understand why you have distributed your assets in the manner that you have. Although not legally binding, a letter of wishes may help to avoid estate disputes and it can serve as an explanation to the Court as to why certain decisions were made.
While many parents have good relationships with their adult childrens’ spouses, it may be prudent to discuss binding financial agreements with adult children to protect them in the event they separate from their spouse.
A binding financial agreement is a legally binding contract which stipulates how assets will be divided in the event of separation. If drafted and executed properly, a binding financial agreement can prevent the Courts from getting involved in the division of assets.
Binding financial agreement may also only apply to certain assets, meaning they can apply solely to inheritances if that is both parties’ intention.
Testamentary trusts are another legal tool which may protect an inheritance from both the division of assets in property settlements and from beneficiaries with money problems.
Testamentary trusts are created by a Will and come into operation once the Will maker dies. A testamentary trust works by allowing the trustees to manage the distribution of funds to beneficiaries. This means that the funds held in a testamentary trust are protected from being divided as part of a property settlement, although they may still be viewed as a financial resource for the beneficiary party.
Testamentary trusts may be suitable for beneficiaries with money problems, young beneficiaries, or beneficiaries with mental health problems as the money can be distributed in smaller sums over time, rather than as one lump sum.
Case Studies
In the case of Mantel & Mantel [2020] the parties had been married for over 30 years and the husband was the beneficiary of both a family trust and a testamentary trust.
Along with the testamentary trust which the husband became a beneficiary of after his father’s death, the husband also inherited outright shares, money and an investment bond. The Court stated the following when assessing the trusts in relation to the marital property pool:
“The family trust and the testamentary trust are not properly to be characterised as property divisible between the parties for the purposes of s 79 of the Act, but they are relevant to the just and equitable division of the property of the parties insofar as they represent financial resources available to the husband.”
The wife had spent more time caring for the children during the marriage and had a lower income as a result. The wife argued that the trust property was open to a property settlement order. The Court disagreed and considered the trusts as a financial resource of the husband. This testamentary trust therefore protected the husband’s inheritance and prevented the inheritance from being divided as part of the property settlement.
This case highlights the importance of seeking legal advice when it comes to estate planning. If Mr Mantel’s father had not created a testamentary trust in his Will, it is likely that the property settlement would have had a vastly different outcome in the wife’s favour.
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Kate Scolyer – Solicitor– Matthies Lawyers
Should you wish to obtain advice regarding your estate planning matters, please contact Matthies Lawyers for an obligation-free consultation or call +61 3 8692 2517 today.
Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice