Welcome to my weekly Insights blog. Each week, we look at a topic in wealth creation, super, estate planning or tax. This week we look at how to protect your family’s wealth when your children’s relationship breaks down.
You’ve spent a lifetime building your wealth, and you want it to help your children. But if a child’s relationship breaks down, money you gave them, or left them, can end up in the property pool and be split with their former partner. This is wealth destruction.
It’s an uncomfortable topic, and most families avoid it. Yet roughly one in three Australian marriages ends in divorce, and de facto couples face the same property rules. A little planning now can make a big difference to what stays in the family.
Key takeaways
- Under the Family Law Act, gifts and inheritances are not automatically protected. The Family Court can include them in the property pool or take them into account when dividing it.
- An outright gift, such as a home deposit, usually becomes part of the couple’s shared property very quickly.
- A binding financial agreement (BFA) is the most direct way for a couple to agree what’s excluded, but it must meet strict legal requirements.
- Keeping wealth in a family trust or a testamentary trust, where your child is a beneficiary but doesn’t control the trust alone, can give strong protection.
- Lending money instead of gifting it, with a written loan agreement and ideally security, can let the money be treated as a debt owed back to you.
Why an inheritance isn’t automatically safe
Many people assume an inheritance or a gift from mum and dad stays with their child if the relationship ends. That isn’t how Australian family law works.
When a married or de facto couple separates, the court looks at everything either of them owns, whoever’s name it’s in. It then considers each person’s contributions and future needs to decide a fair split. An inheritance is usually treated as a contribution by the child who received it, but it can still be shared.
Timing matters. Money received late in a relationship, and kept separate, is more likely to stay with your child. Money received early and mixed into a joint home or bank account is much harder to protect.
Your four main options
| Option | How it works | Level of protection | Watch out for |
|---|---|---|---|
| Outright gift | You transfer money or assets to your child | Low | Becomes your child’s property and is easily mixed with their partner’s |
| Documented loan | You lend the money under a written agreement, repayable on demand and ideally secured by a mortgage | Medium to high | Must be a genuine, enforceable loan, not a gift in disguise |
| Family or testamentary trust | Assets stay in a trust and your child receives distributions | Medium to high | Weaker if your child controls the trust on their own |
| Binding financial agreement | Your child and their partner agree in writing what’s excluded if they separate | High, if done properly | Strict legal formalities; can be set aside in some cases |
Binding financial agreements
A binding financial agreement, sometimes called a “prenup”, is a contract between your child and their partner under the Family Law Act. It sets out how property will be dealt with if they separate. It can be signed before the relationship, during it, or after a separation.
A BFA can specifically exclude gifts and inheritances from family, so it’s the most direct protection available. But it only works if it’s done properly:
- Each person must receive independent legal advice before signing, and their lawyer must sign a certificate confirming it.
- Both people should fully disclose their finances.
- Neither should be pressured into signing, especially close to a wedding.
Even then, a court can set a BFA aside in some situations, such as fraud, unconscionable conduct, or a major change involving the care of children. A BFA is something your child arranges with their partner and their own lawyer. As a parent, your role is to raise it early and, where appropriate, make it a condition of significant help.
Trust distributions versus outright gifts
Instead of handing over a lump sum, many families keep wealth inside a trust and let children benefit from it over time.
Family (discretionary) trusts. Assets held in a discretionary trust don’t belong to any one beneficiary. Your child has a hope of receiving distributions, not a right to the assets. This generally makes them harder for a court to treat as your child’s property.
Testamentary trusts. A testamentary trust is created by your Will. Instead of your child inheriting directly, their share goes into a trust they can benefit from. A well-drafted protective testamentary trust can help keep the inheritance out of reach of a former partner, and it can offer tax benefits too.
The catch is control. The High Court has made clear that if one spouse effectively controls a trust, its assets can be treated as their property. If your child is the sole trustee and appointor, the protection is much weaker. Many families share control with a sibling or another trusted person, or hand control to the child gradually.
Even where trust assets aren’t treated as property, a court may still see regular distributions as a financial resource of your child. That can affect how the rest of the pool is divided, so a trust reduces risk rather than removing it.
Loan-back strategies: lend, don’t give
The “bank of mum and dad” is one of the biggest sources of home deposits in Australia. If you help a child buy a home, consider lending the money instead of gifting it.
A genuine loan is a debt your child owes back to you. If they separate, the debt can generally be deducted before the pool is divided. For the loan to be taken seriously, it should:
- Be in writing and signed at the time the money is advanced, ideally by both your child and their partner.
- Be repayable on demand, so you can call it in if needed.
- Be secured where possible, for example by a registered second mortgage over the property.
- Be treated like a real loan. Record any repayments or interest, and review the agreement every few years so it doesn’t lapse under limitation laws.
Courts look closely at family loans. An undocumented “loan” that nobody ever expected to be repaid is usually treated as a gift. The more it looks like a commercial arrangement, the stronger it is.
The same idea can apply to an inheritance. A testamentary trust can lend funds to a beneficiary for a home purchase rather than distributing capital outright, keeping the asset in the trust.
Tax and Centrelink points to keep in mind
- No gift tax. Australia has no gift or inheritance tax, but giving away an asset other than cash, such as shares or property, can trigger capital gains tax and stamp duty.
- Centrelink gifting rules. If you receive, or may soon receive, the Age Pension, gifts above $10,000 in a financial year or $30,000 over five years count as your assets for five years. A loan isn’t a gift, but Centrelink still counts it as your financial asset.
- Trust distributions must be real. A distribution to an adult child should genuinely benefit that child. Distributions that are really enjoyed by someone else can attract ATO attention under section 100A.
Frequently asked questions
Is an inheritance protected in a divorce in Australia?
Not automatically. The Family Court can include an inheritance in the property pool. It’s usually treated as a contribution by the person who received it, and it’s more likely to stay with them if it was received late in the relationship and kept separate.
Should I lend or gift my child a home deposit?
If protecting the money matters to you, a properly documented loan is generally safer than a gift. Put it in writing, make it repayable on demand, and consider securing it with a registered mortgage over the property.
Does a testamentary trust protect an inheritance from a child’s divorce?
It can help significantly, especially if your child doesn’t control the trust on their own. The court may still take the trust into account as a financial resource, so it reduces the risk rather than removing it entirely.
Can parents make their child sign a binding financial agreement?
No. A BFA is an agreement between your child and their partner, and each must get independent legal advice. Parents can encourage one, or make financial help conditional on it, but pressure on either partner can make the agreement easier to overturn.
Plan the conversation, not just the paperwork
The best protection usually combines a few of these tools: a Will with testamentary trusts, family loans that are properly documented, and an open conversation with your children about why it matters. Done early and explained well, it’s about protecting the whole family, not about distrusting anyone.
At TaxAssist Accountants Dee Why, we work alongside your estate and family lawyers on the tax and structuring side, including trusts, loan arrangements and the Centrelink impact of gifting. Call us on (02) 9045 1511 or email [email protected] to start the conversation.
This article contains general information only and does not take into account your personal circumstances. It is not legal or financial product advice. Family law and estate planning arrangements should be prepared by a qualified lawyer.
