If my beneficiaries get divorced, can I protect the assets that I’ve left to them after my death?
Divorce is a reality of modern society, with statistics revealing around one in three marriages end in divorce. When a divorce occurs, both of the parties to the divorce will have to define, declare and value all of their current assets. This includes any assets that either party may have inherited. The final asset pool is formed of all assets, liabilities and superannuation interests from both parties before the assets are divided.
Standard Wills
In most circumstances, when making a Will, Will maker’s use a Standard Will to leave their assets to their beneficiaries. A Standard Will is generally a Will in its simplest form, appointing Executors, naming Beneficiaries and naming assets and how they are to be distributed. When the Will maker dies, the beneficiaries receive their inheritance directly from the Estate with no asset protection.
If the beneficiary of a Standard Will has a divorced finalised any time after the death of the Will maker, the inheritance received from the Will maker will form part of the divorcing couple’s asset pool for division.
Quite often, Will maker’s do not want the divorcing spouse of their beneficiary receiving any of their inheritance. However, the problem with a Standard Will is that it does not offer any asset protection to the Will maker’s beneficiaries.
Testamentary Trust Wills
Testamentary Trust Wills have grown in popularity in the last few decades. Once they were the domain of the wealthy, used to protect their inter-generational wealth and minimise their tax. Now, more Will makers are considering the use of a Testamentary Trust Will as an asset protection vehicle when conducting Estate Planning.
A Testamentary Trust Will sets out how the Will maker wants their assets distributed when they die. However, rather than the beneficiaries receiving their assets directly as they do in a Standard Will, the assets are held on trust by a trustee. The trustee then makes distributions to the beneficiaries according to the Testamentary Trust Will. The trustee has a fiduciary duty to act in the best interests of the beneficiaries of the trust.
Because the beneficiary’s inherited asset is held on trust by a trustee, the beneficiary does not have control of the inherited assets, however, may have the use and enjoyment of the assets at the trustee’s discretion.
In simple terms, due to the inherited assets being controlled by a trustee (who is not a party to the divorce proceeding), the inherited assets will likely be excluded from the marriage assets and not claimable by the other party in a divorce.
The negatives of a Testamentary Trust Will are:
They cost more than a Standard Will
The Will maker needs to appoint a trustee they trust and who is competent to administer the trust after they die
The Testamentary Trust/s that arise from a Testamentary Trust Will cost more time and money to administer than a Standard Will
The beneficiary does not have control of the inherited assets.
The positives of a Testamentary Trust Will are:
If the Testamentary Trust is administered properly, there is asset protection for beneficiaries in divorce proceedings
Options for beneficiaries to minimise tax
Protection for the inherited assets if a beneficiary becomes bankrupt
Protection for the inherited assets if a beneficiary is a spendthrift or cannot manage their own affairs due to addiction or other reasons
Protection for the inherited assets if a beneficiary has an occupation that is highly litigious.
I have seen firsthand the growth in popularity of Testamentary Trust Wills due to Will maker’s wanting to protect the assets they leave to their beneficiaries and the tax minimising opportunities they provide.
On the other side of the coin, I have also witnessed the relief from beneficiaries who have gone through divorce proceedings and have seen the protection a Testamentary Trust Will offers, keeping inherited assets from a divorce asset pool division.
If asset protection for the assets you leave to your beneficiaries is something that is of interest to you, a Testamentary Trust Will may be worth your consideration.
Author: Mark Murnane, Wills + Estate Planning lawyer
DISCLAIMER: This article is provided for general information purposes only. It does not constitute specific legal advice or opinion. Although our aim is to provide you with as accurate information as possible, you should not act or rely upon the information in this article without seeking the advice of an experienced lawyer who specialises in the particular area of law relevant to your inquiry. Please do not to hesitate to contact Murnane Legal to make further inquiries or to make an appointment to discuss the specifics of your situation.
