Why inheritance asset protection is necessary

With more than half of marriages and de facto relationships ending these days, parents are reconsidering how they structure their wills with testamentary trusts to protect their assets and avoid their legacy ending up in the wrong hands.

Inheritance and wills can be complicated at the best of times.

Clients often ask how they can structure trusts to protect the family assets they want to hand down in an inheritance. This is because they want to avoid their legacy falling into the wrong hands if relationship breakdowns arise for their children and grandchildren.

Statistics show about half of first marriages end in divorce and more than half of second marriages and de facto relationships end, with the average length of a first marriage ending in divorce lasting about eight years.

For this reason, many parents are reconsidering how to best protect their assets and estates when penning their will to ensure inheritance stays in the family. Doing this work early can help prevent messy money problems eventuating for their children in the case of a future spousal relationship breakdown.

Testamentary trusts are the answer, and they’re being used at a rate well above the average rate of marriage and de facto relationship breakdowns. The majority of wills (around 90 per cent) drafted by lawyers now incorporate testamentary trusts.

With a testamentary trust, rather than leaving assets directly to a beneficiary as a straight gift, the assets are transferred into a trust and held on behalf of an individual or group of beneficiaries to protect the assets.

Having these protections in place is important for clients from all walks of life, whether they’re planning to leave their family home to their children, or leave other assets such as cash, shares, bonds, or investment properties.

The cost of setting up and managing a testamentary trust is balanced out by the protection and peace of mind it affords those using them.

Not only do testamentary trusts provide options for asset protection, they also provide tax-effective structures that lower the tax payable on distributed income to beneficiaries who earn little or no income.

Parents can also be assured that testamentary trusts typically don’t come into force until after the will maker’s death.

It is possible for a will to have more than one testamentary trust, with options for separate trusts for each child or grandchild.

One strategy is to distribute income to spouses, children or grandchildren who earn little or no income, rather than an adult on a high marginal tax rate. Income distributed to children under 18 is taxed at ordinary adult marginal rates, including a tax-free threshold, rebates and offsets.

There are several reasons why wills being prepared by parents attempt to exclude their children’s spouses or partners from being eligible for a share of their estate. The main reason, and the most important one, is to protect their hard-earned legacy from inadvertently ending up with someone it was not intended for in the case of relationship breakdowns. There are other advantages, including receiving tax benefits.

To find out more about the importance of protecting your assets or to discuss how to handle an inheritance, get in touch with our team.

Posted in Uncategorized and tagged , , , .