Not your marriage. We’re talking about the marriages, actual or de facto, of your children.
You’ve worked hard for your wealth. Do you want it shared with or claimed by your child’s spouse if that relationship ends after your death?
An inheritance left to a child outright can end up in their divorce settlement or in the hands of their trustee in bankruptcy. In Western Australia the usual answer is a discretionary testamentary trust, which lets your child benefit from the inheritance without owning it.
How does this happen?
An example shows it best.
Harry and Sally are a retired couple with an estate of about $3 million. They have two children, Adam and Beth.
Adam’s marriage isn’t going too well. He and his wife are still together, but it isn’t clear for how long. Adam also runs his own business, a retail shop. He struggles to make ends meet and Harry and Sally are worried the business may fold.
Under a simple Will leaving everything to the two children equally, Adam receives about $1,500,000 in his own name. That inheritance is completely unprotected.
If Adam separates from his wife, the $1,500,000 is probably in the asset pool available for division. If the business goes under, Adam’s trustee in bankruptcy will probably take the $1,500,000 for the creditors. In both cases the money Harry and Sally spent a lifetime accumulating ends up somewhere they never intended.
How do Harry and Sally stop this?
Harry and Sally need Wills that include a discretionary testamentary trust or DTT, for Adam’s share.
Instead of Adam receiving $1,500,000 in his own name, the money is held in a trust. Adam can be the trustee, so he controls it. He is also one of a class of discretionary beneficiaries, along with his children and other family members. What he doesn’t have is an entitlement to any particular amount.
By separating ownership from control and making sure Adam’s only interest is as one of the discretionary beneficiaries, his parents create the strongest argument that the inheritance isn’t available to a claim on his divorce or bankruptcy.
We explain how these trusts work in Everything you need to know about testamentary trusts.
Is a discretionary testamentary trust guaranteed to work?
No – and anyone who tells you otherwise is overselling it. A DTT gives you the strongest available argument, but it isn’t an absolute protection.
In a family law dispute the Court can treat a trust as a financial resource of your child even where the assets aren’t theirs and that can affect how the rest of the pool is divided. Where your child controls the trust absolutely and has always used it as their own money, the argument gets weaker. How the trust is set up and how it’s actually run both matter.
Bankruptcy is Commonwealth law rather than Western Australian law and the protection there depends on the same point. Assets your child doesn’t own generally aren’t available to their creditors.
Who should think about this?
The situations that come up most often are a child in an unstable relationship, a child who runs a business or gives personal guarantees, a child in a profession carrying personal liability, a child with a gambling or addiction problem and a child receiving a Centrelink or NDIS payment that a lump sum would affect.
You don’t have to treat your children the same way. Harry and Sally can leave Beth her share outright and put Adam’s into a trust. They can also give every child the option of taking their share through a trust or not, decided after the death rather than years before it.
Frequently asked questions
Can my child still use the money?
Yes. Your child can be the trustee and decide what the trust does with the money. The difference is that they benefit from it rather than own it.
Does my child’s spouse find out?
They will if the relationship ends, because the trust has to be disclosed in a family law dispute. The protection comes from how the trust is structured, not from anyone not knowing about it.
Is a DTT only for large estates?
No, though the benefit has to be worth the administration. A trust has to lodge tax returns and keep records for as long as it runs and that’s an ongoing job for whoever is trustee.
Can I set one up now?
A testamentary trust is created by your Will and comes into existence when you die. Nothing happens during your lifetime and you can change your mind at any time by making a new Will.
Protect what you leave behind
If any of this sounds like your family, it’s worth an appointment before you make or update your Will. We’ll tell you whether a trust is worth it in your situation and help you to structure the best type of trust for your family.
Book an appointment or call the Wills team on (08) 9220 4433.
See our Testamentary trust Wills service and pricing.
This article is general information and not legal advice.
