Can an Inheritance be Quarantined?
A vexed question which frequently confronts many a will maker is how can a benefit left via a will to an adult child be protected if that beneficiary later experiences a marital or de facto breakdown. In reality it is difficult to quarantine inheritances in divorce settlements where the inheritance has vested in the beneficiary from the reach of the Family Court.
A vested inheritance, including freehold real estate received pursuant to the terms of a Will and held in the name of a husband or wife to a marriage is property for the purposes of Section 79 of the Family Law Act (“the Act”) even if it is received years after separation but before the parties have completed their matrimonial property settlement (Holland v Holland  FamCAFC 166. It is important to settle family law property settlements in a timely manner – See also my article “Don’t Die Before Property Divorce Settlement“.
Similarly, assets held in a Testamentary Trust where a party to a marriage is a Trustee and beneficiary and in ultimate control of the trust is properly categorised as property for the purposes of section 79 of the the Act. An asset that is considered property of the parties or a party to a marriage is available for distribution between the parties upon the breakdown of the relationship.
If inherited assets are included in the property pool the relevant questions will be whether the assets should be considered on a “global basis” or an “asset by asset” approach and what contribution the other party to the marriage made toward the inherited asset.
When considering the use of a Testamentary Trust as a vehicle for the protection of inheritances in divorce settlements from the reach of the Family Court it is important for the will maker at the time of making the will to reflect upon the stability of the marital or de facto relationships of any adult beneficiaries. If those relationships are on shaky ground then a Testamentary Trust may be an appropriate vehicle for the protection of the inheritance but it will be important that the Testamentary Trust is set up carefully.
Proper consideration will need to given to the person who will hold the role of Appointor and Trustee of the Trust. A Testamentary Trust created where the beneficiary is neither the Appointor or Trustee and cannot by the terms of the Trust Deed assert control over the trust to obtain a beneficial interest in the trust property may be beyond the reach of the Family Court in that the Testamentary Trust so created would not be property within the meaning of section 79 of the Act and therefore not available for re-distribution between the parties of the marriage. (Bernard & Bernard  FamFc 421).
However, if an asset such as an interest in a Testamentary Trust is not property it may still be considered a financial resource and therefore taken into consideration when the Court exercises its discretion pursuant to section 75(2) of the Act.
For further information please contact Michelle on 8362 6400 or email Michelle Crichton. Join our mailing list to receive updates and advice on current issues.