This is a question we are commonly asked by parents keen to pass money to their children. It often follows advice from their accountant or IFAs, since making such transfers can sometimes be advantageous for tax purposes.
What happens if, having made that transfer, your son or daughter divorce?
If a divorce is commenced then one spouse can seek a share of everything in which their spouse has an interest. This can, and very often does, extend to money received from parents or extended family members.
What can you do to protect the money you give to your child?
A common way of trying to tackle the payment in an unforeseen divorce might be to suggest that the payment was a loan rather than a gift. These efforts are often in vain however.
Even if the payments are genuine loans, the courts will sometimes view them as being ‘soft loans’ and something that will not need to be repaid, regardless of the intentions of the parents and the children – the phrase “an advance on inheritance” is something that the courts hear and use a lot. The consequence of this is that although money is, in theory, owing, it is disregarded and the payment still considered to be an asset.
This potentially leaves the parents in a quandary. They will often want to help their child get on the property ladder or provide them with an early share of the estate, but what effective way is there of paying this money without exposing it to the risk of a claim from the spouse?
The answer is the pre or post nup.
Pre and post-nuptial agreements
Pre and post-nups are often drawn up immediately before significant payments are made to a son or daughter – almost as a condition of the son and daughter receiving the payment.
Whilst such agreements aren’t legally binding, they do carry strong persuasive weight and record the intention of everyone involved, that the money would be preserved for the bloodline in the event, however unlikely, that the marriage ends in divorce.
If the agreement is to be entered into before a marriage, the pre-nup is required. If it is after the marriage, then it is a post-nup.
The child and spouse, or future spouse, would each need to be separately advised. However, these agreements are often straightforward to negotiate and conclude. They allow the children to enjoy the payment and the parents to rest easy.
This article is part of a series on the various benefits of pre and post-nuptial agreements:
- Parents, pre-nups and paying for house deposits
- Second Marriage & Adult Children – how to address financial concerns
- Inheritance & Money – what are the consequences of ‘mingling’ inherited assets?
- Farming pre and post-nups – benefits for succession planning
- Tax Planning for Families – the benefits of pre and post-nuptial agreements