Early inheritances and gifts towards adult children are increasingly common as the generational wealth gap widens over time. Can such inheritances and gifts be protected in the event of a separation?
We are often approached from both:
1. Parents who intend to give funds to a child and want to protect the funds from a future separation, or have already advanced such funds; and
2. Adult children, who has received or are going to receive funds from their parents and either:
a. Are in a relationship and want to protect the funds in the event of their separation; or
b. Are going through a separation and are wondering what they can do.
Legal Solution
The options for protecting gifts/early inheritances are limited and depend upon a family’s specific circumstances. However, they include:
• Entering into a loan agreement with your child and/or child’s spouse, ensuring such agreement is drafted correctly, is commercial and is complied with. If this is the case though, is it really a gift?
• An adult child entering into a financial agreement with their partner/spouse that provides for the repayment of the contribution from the parents to either the parents, or, to the child prior to any further distribution. For example, if the parents gifted $500,000 to the child, then upon separation, prior to dividing a pool of assets worth $1 million, the child (or child’s parents) are to receive $500,000, before the remaining $500,000 is divided between the child and their partner.
We commonly see agreements prepared in the absence of family lawyers such as caveats on the title of properties, loan agreements and mortgages that do not meet the requirements of the Federal Circuit and Family Court of Australia. When that occurs the Court must ask whether the funds were a gift (and if so, to whom), or a loan. If they are found to be a gift, then the funds are ordinarily part of the pool of assets available for division between the parties.
What you should not do
If ever there is a thought or intention that funds gifted are to be repaid make sure you action it early. We sadly see good intentions and wishes so often forgotten. So do not sit on your hands and hope it will be an amicable separation where intentions are honoured and you see eye to eye. In our experience that does not occur and there is often a disconnect between parents, their child and the child’s spouse.
Unless you are willing for your gift or early inheritance to be included in a property settlement make sure to speak to a lawyer before any movement of money.
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