Family Trusts & Financial Structures Can Safeguard Your Wealth & Protect Your Assets During a Divorce or Separation
Divorce and de facto separation can be challenging and emotional, often leading to disputes over assets and financial resources. Wealth protection is a major consideration for those who have accumulated significant assets or have children they’d like to ensure assets are passed down to.
In Australia, various financial structures and legal instruments, such as family trusts and prenuptial agreements, can play a vital role in safeguarding your wealth. This article explores how these strategies can be employed effectively to protect your assets in the event of a divorce.
Please be aware that this advice is general. You’ll need to speak to your Divorce Lawyer about your specific situation to make an informed decision about what is right for you.
Understanding the Importance of Asset Protection
The division of assets during a separation can be influenced by various factors, including the length of the marriage or de facto relationship, contributions made by each party, and the future needs of both individuals.
In Australia, the Family Law Act 1975 governs the division of assets and ensures that property settlements are fair and equitable. However, proactive measures must be taken to preserve and protect wealth.
Family Trusts: A Key Tool for Asset Protection
Family trusts are a popular and effective tool for protecting assets from potential claims in a divorce. By placing assets into a family trust, they are legally owned by the trust rather than by an individual. This can provide significant protection as the assets held within the trust are generally considered separate from the individual’s personal assets.
How Family Trusts Work:
- Structure: A family trust is established by a trust deed, which outlines the terms and conditions under which the trust operates. The person who sets up the trust is known as the settlor, and the assets are managed by a trustee on behalf of the beneficiaries.
- Asset Protection: Assets transferred into the trust are no longer legally owned by the individual but by the trust. This means that, depending on how the trust is structured and managed, in the event of a divorce, these assets may not be directly accessible to the ex-spouse.
- Control: The trust deed can specify how and when the assets are distributed to beneficiaries, which can help in managing and protecting family wealth.
John and Emily are married and have substantial investments and real estate holdings. To protect these assets in the event of a divorce, John sets up a family trust and transfers the assets into the trust.
As the trustee, John manages the assets, while the beneficiaries include himself, Emily, and their children. If John and Emily divorce, the assets held within the family trust can be subject to division, providing protection for their wealth.
In other words, one party to a marriage or a de facto relationship can’t prevent the other party from sharing in a division of those assets simply by setting up a trust.
Testamentary Trusts: Protecting Wealth Through Wills
Testamentary trusts are established through a will and come into effect upon the death of the will-maker. They can also play a vital role in protecting assets and ensuring that wealth is distributed according to the deceased’s wishes.
How Testamentary Trusts Work:
- Structure: A testamentary trust is created by including specific provisions in a will. Upon the death of the will-maker, the trust is established, and the assets are transferred to it.
- Asset Protection: Testamentary trusts can protect assets from being directly accessible by beneficiaries, providing control over how and when the assets are distributed. This can be useful for protecting assets from potential claims in a divorce if the beneficiaries are involved in future marital disputes.
- Tax Benefits: Testamentary trusts can also offer tax advantages, as income generated from the trust may be distributed in a way that minimises tax liability.
Sarah has substantial assets and wants to ensure they are protected and distributed according to her wishes after her death. She has recently gone through a divorce and is 48, and even if she repartners, would like her children to have access to her assets in the event of her death. She includes a testamentary trust in her will, specifying that her assets be placed into the trust upon her passing.
The trust is managed by a trustee, who distributes the assets to Sarah’s children and grandchildren according to the terms of the trust. This arrangement ensures that the wealth is preserved and not subject to division in the event of future family disputes.
Prenuptial Agreements: Preventing Future Disputes
A prenuptial agreement, or prenup, is a legal document that outlines the distribution of assets and financial responsibilities in the event of a divorce. Prenups can be an essential tool for protecting assets and ensuring that both parties are aware of their financial arrangements before marriage or the start of a de facto relationship.
How Prenuptial Agreements Work:
- Structure: Both parties sign a prenuptial agreement before the marriage/start of the de facto relationship. It details how assets, debts, and financial responsibilities will be divided if the marriage ends.
- Protection: For example, prenups can protect individual assets, such as property or investments, by specifying that they will remain the property of the individual who brought them into the marriage. This can prevent disputes and ensure clarity in the event of a divorce.
- Clarity: Prenups can reduce the likelihood of contentious legal battles and provide a clear framework for asset division by addressing financial matters upfront.
Michael and Lisa are planning on ‘tying the knot’ and both have significant personal assets, as well as some business debt. To protect their individual wealth and ensure clarity in the event of a divorce, they have decided to enter into a prenuptial agreement.
The prenup outlines how their assets, including real estate, their businesses and investments, will be divided if their marriage ends. This agreement provides peace of mind and helps avoid potential conflicts in the future, as long as it is drawn up in a legally sound manner.
It is an essential part of any prenup that both parties obtain independent legal advice about the agreement, and that their respective lawyers sign certificates that they have given that advice.
St John Heath, Tonkin Partner, discusses Financial Agreements, such as prenuptials and post nuptials, in this short video:
Other Financial Structures That Assist In Protecting Wealth
In addition to family trusts, testamentary trusts, and prenuptial agreements, there are other financial structures and strategies that can help protect wealth:
- Company Structures: Holding assets through a company can provide protection, as the company, rather than the individual, owns the assets. This can limit personal liability and shield assets from personal claims.
- Superannuation Funds: Certain types of superannuation funds may offer protection for retirement savings, although specific rules apply. It’s essential to understand how superannuation can be impacted in a divorce and consider strategies to protect these funds.
- Financial Agreements: Similar to prenuptial agreements, financial agreements can be made before, during, or after a marriage or de facto relationship. These agreements provide a legally binding arrangement on how assets and financial matters will be managed and divided. As with prenups, both parties must obtain independent legal advice to make the agreement legally binding.
Why Asset Protection Matters
Protecting assets in a divorce is crucial for several reasons:
- Preservation of Wealth: Ensuring that your wealth is protected can prevent significant financial loss and ensure that your assets are preserved for future generations.
- Clarity and Certainty: Proactive asset protection measures provide clarity and certainty about how assets will be managed and divided, reducing the potential for disputes.
- Financial Security: By protecting assets, individuals can maintain financial security and stability, even in the event of a relationship breakdown.
Conclusion
Protecting assets in a divorce involves careful planning and the use of strategic financial structures. Family trusts, testamentary trusts, prenuptial agreements, and other financial arrangements can play a vital role in safeguarding wealth and preserving assets.
By understanding and implementing strategies like this, you can effectively protect your financial interests and navigate divorce with confidence. For personalised advice and assistance in implementing asset protection strategies, consulting with a qualified family lawyer and getting financial advice is essential.
By utilising such strategies, individuals can better protect their assets and secure their financial future in the event of a divorce.
