If you are concerned about protecting your child’s inheritance from a future divorce or relationship breakdown, you are not alone. It is a common concern of many of our clients.

While most clients report good relationships with their sons in law and daughters in law, there is still an underlying natural preference to keep family assets within the family and the family’s direct descendants in the event of a child’s relationship breakdown.

A common method which is often used to protect an inheritance from a future family law proceeding is providing an inheritance in the form of a testamentary trust (i.e. a trust created by a will) rather than providing an inheritance outright. This is because assets that are held in a properly established and well controlled testamentary trust are less likely to be deemed a divisible asset of the relationship and are more likely to be considered a financial resource or neither.

The most effective tool however, in protecting and defending inheritance from a future family law proceeding, is to have your child enter into a financial agreement (“FA“) with their spouse or partner, often referred to as a ‘prenup’.

What is a Financial Agreement?

FAs are available to both married and de facto couples and can be entered into before or during a relationship or after a relationship has ceased pursuant to the Family Law Act 1975 (Cth). They set out how a couple’s property and financial resources are to be divided in the event of the breakdown of the relationship and often also deal with the maintenance of the parties to the agreement during the relationship and/or after the relationship.

FAs do not necessarily need to deal with the entirety of a couple’s pool of assets and may deal with assets selectively for a particular purpose. For example, an FA may be used to preserve an inheritance or an anticipated inheritance by providing that such inheritance be quarantined for retention by one of the parties.

The Advantages of a Financial Agreement

By completing an FA, your child will have greater certainty concerning their property and financial resources and any disputes about financial matters, in the event of a marriage breakdown, will be avoided. FAs, if properly completed with appropriate family law advice, should prevent the Courts from becoming involved in settlements between the parties.

FAs can also be particularly useful in situations where one party brings considerable wealth to a relationship, where there are children from previous relationships who have to be considered, or in the context of family loans and gifts.

Agreement to Obtain a Financial Agreement

If your child is not currently in a relationship, you may also wish to consider having an “agreement to obtain a financial agreement” prepared as part of your estate planning arrangements.

The purpose of an “agreement to obtain a financial agreement” is to obtain an undertaking from your child that:

  • if he or she intends to marry or enter into a de facto relationship, that they will ensure that they enter into a FA; and
  • as part of its terms, the FA will quarantine the assets they inherit from you, from being available for division in a property settlement if their marriage or de facto relationship fails.

The agreement will effectively be morally binding. However, the intention is that the agreement will:

  • raise the awareness of your child that making a financial agreement with an intended spouse should be considered a prudent asset protection strategy; and
  • assist your child in broaching the subject of a financial agreement with their intended spouse.

If you would like to find out more about the benefits of using financial agreements in your estate planning arrangements, please contact our office on (07) 3221 9744 or visit our website to get started online.