How To Protect My Inheritance & Assets in Relationships
If you are embarking on marriage or in a de facto relationship (or you are the parents of someone who is) and want to know how to protect financial contributions or other assets, including future inheritances, you are in the right place.
Here we explain:
- What happens to assets and inheritances if a de facto relationship or marriage ends
- How to protect your assets from your partner / future spouse
- How to protect inheritance from divorce / de facto separation
- How to protect future inheritance from divorce / de facto separation
Common queries we hear from individuals and parents answered on this page include:
- Are assets acquired before marriage protected?
- Does a prenup protect assets before marriage?
- What parents providing financial support to help their child buy property must know first
Before we get into how to protect assets from your partner or spouse, including inheritances, we must first understand what is involved in the processes of financial separation in Australia. Then we will unpack what to know about how Family Law treats loans, gifts and inheritances upon the end of a de facto relationship or marriage.
The Financial Separation Process
Upon separation, the financial settlement process (commonly referred to as the property settlement process) can start immediately.
Marriages and de facto relationships are largely treated the same way in Australia when it comes to property settlements. The key difference between separating couples of de facto relationships and marriages relates to the time frames:
- A de facto property settlement must be completed within two years of the date of separation; &
- For marriages, the property settlement must be applied for with the Court within 12 months of a divorce being granted.
The property settlement process begins with a requirement for both parties to provide full and frank disclosure of all assets and liabilities, otherwise known as the “property pool”. That is, disclosure of all assets including cash, jewellery, art, property, superannuation, investments etc that were brought into the relationship, acquired during the relationship as well as all liabilities that exist, and until the terms of the settlement are finalised.
This includes the disclosure of any gifts, inheritances or windfalls that either party receives or becomes aware they will receive, until the point in time that the terms of the Property Settlement are finalised.
Related: Financial Disclosure Explained
The process then turns to determining the financial, non-financial contributions and parent / homemarker contributions. Finally, the assessment of the current and future circumstances of both parties, amongst other considerations. Be aware that a financial settlement is based on what assets and liabilities the separated couple has at the time they finalise the property settlement process. So, it is wise to start the process early rather than risk the property pool increasing (or decreasing) over time.
It can take time to negotiate and to come to an Agreement about the terms of their Property Settlement and, if an Agreement cannot be reached, the Court process requires additional time and costs to get an outcome.
When a Property Settlement is Not Required
There are circumstances when a property settlement may not be required:
- If there are no assets, properties or debts to be divided
- Each person in the relationship kept their income, assets and expenses separate with clear records as evidence
- The couple had a Binding Financial Agreement in place that details how the assets and property is to be split upon the end of the relationship that would not be able to be set aside (reversed).
To ensure you meet the requirements of these circumstances in accordance with the Family Law Act, you will need to seek advice from a family lawyer. Otherwise, if it is found later on that there should have been a Property Settlement, the process will need to start from that point in time, upturning people’s lives just when they thought their obligations were complete in terms of their separation.
We will explore Prenuptial Agreements and Binding Financial Agreements below, but first we must unpack how Family Law treats inheritances, whether they be gifts or early inheritances, future inheritances or loans.
Loans, Gifts & Early or Future Inheritances
In circumstances where parents wish to support their children by providing financial assistance to help them purchase property, sometimes parents wish to help by accessing an “early inheritance”, or by way of a gift or a loan. The details of whether the funds provided are in fact a gift or a loan, are often unclear when a relationship comes to an end.
There may be a forensic benefit for one party by having it as a gift or conversely, detrimental to one party having it as a loan, as it would reduce the property pool available for division.
What needs to be determined is whether any financial contributions provided by a party’s parents (or someone else) were either:
- A gift; or
- A loan
Loans
If the Family Court were to find that funds provided by parents were a loan, then the loan would be considered a liability on the property settlement balance sheet, to be repaid to the parent/s.
To protect the financial contribution parents have made from being available in the Property Pool for division, it must be clear that the contribution was a loan. Parents can be left without remedy when loans are unclear or invalid and find that they cannot call upon the loan.
If there is no proper Loan Agreement in place, parents can find themselves with no avenue to recover the debt and costs incurred from the relationship or marriage. Each state and territory has its laws in relation to timeframes in which someone can attempt to recover an unpaid debt. If parents wish to provide funds as a loan, with repayments to be made, a documented agreement on paper will be insufficient.
If funds are intended to be provided as a loan, a proper Loan Agreement must be drawn up to detail the arrangements. Additionally, there must be a continual repayment, even if it is only one dollar per month for a period of time. Making periodic payments proves the loan is valid, and makes it clear that it is a loan to be repaid, and not a gift available for division.
Gifts
If the Family Court were to find that the funds provided by parents were a gift, this would be considered a financial contribution, making it part of the property pool available for division between the parties.
Inheritances
As mentioned above, if someone receives an inheritance during the relationship or post separation but prior to the property settlement being finalised, any imminent inheritance must be disclosed. This falls under the requirement for “full and frank” financial disclosure. If the inheritance is effectively quarantined by way of a valid Binding Financial Agreement, it will be considered part of the property pool and available for division.
Other Common Questions about Protecting Assets, Gifts & Inheritances
Does a prenup protect assets before marriage?
In Australia, unless there is a well-constructed valid Binding Financial Agreement in place quarantining the assets in question, they will not be protected from any future property division. Learn more about how to protect assets acquired prior to a de facto relationship or marriage here.
How to protect your assets in a de facto relationship or marriage?
All assets and property brought into the relationship and acquired during the relationship will be available for division in the property settlement unless a Binding Financial Agreement effectively quarantines those assets. If one or both people have business interests, this must be considered carefully with the advice of your family lawyer who will work with your advisors to determine what will be required to minimise the impact of separation and divorce on the business and maximise the opportunity for the protection of those assets, where possible.
How do you keep inheritance money separate?
To keep inheritance money separate in a de facto relationship or marriage, you must enter into a Binding Financial Agreement detailing how your inheritance will be treated in the event of a separation.
How to Protect Inheritance from Divorce or De Facto Property Settlements
A Financial Agreement, often referred to as a Prenup or Prenuptial Agreement for couples embarking on marriage, is an Agreement that details the terms of a future financial settlement, in the event the marriage or de facto relationship were to come to an end.
This type of Agreement is only legally binding if:
- It has been drafted correctly by a family lawyer
- The parties to the agreement were not under any pressure to sign it
- Both parties to the agreement sought independent legal advice before signing it; and
- Both family lawyers reviewed and signed the Agreement.
If the agreement is legally binding it is called a Binding Financial Agreement, or BFA.
A poorly drafted Prenup or Financial Agreement can be set aside. That is, rendering it useless and the parties will be required to go through the Property Settlement process as though no prior BFA existed.
All Binding Financial Agreements must be revisited as circumstances change. For example, if a couple has children and if their financial circumstances have changed. The existing Agreement can be updated or a better option is when a new Agreement is drafted and put into place along with a stand alone termination of the previous Agreement.
Can a Prenup Protect Future Inheritance?
A well drafted Prenuptial Agreement can protect future inheritances however they are not foolproof. While they are the highest level of protection, they must be updated with life events such as the birth of children, changes in financial circumstances such as increase or reduction of assets and liabilities, and to keep up to date and in line with amendments to Family Law that are inevitable.
How to Protect my Inheritance & Assets Effectively
An inferior Prenuptial Financial Agreement is not uncommon. If you are going to go to the effort of getting a Prenup/BFA in place, ensure it is done by a specialist. There are many times where an Agreement has been set aside because it could not be complied with as some assets fell outside of the Agreement’s provisions.
Not all family lawyers will draft Binding Financial Agreements for de facto relationships or pre-marriage. Many family lawyers do not like the complexity involved, especially in circumstances where there are high net worth individuals and complex structures involved.
For the people we assist with these types of Agreements, they have worked hard to generate and maintain the wealth they have. Whether they be parents wishing to gift, loan or pass on an inheritance to their child or children, or individuals who wish to quarantine their wealth or certain assets in the event of a relationship breakdown, each requires protection that is of the highest quality.
While these Agreements aren’t foolproof, when drafted correctly, they are the best protection available in Australia. I always say that you wouldn’t go to a brain surgeon to operate on your heart. It is the expertise and attention to detail and quality of the Agreement that will determine its’ effectiveness, if it is ever required.
Our family lawyers draft and review both prenuptial Binding Financial Agreements and De facto Agreements.
