This is a question that we are commonly asked by parents keen to pass money to their children. It very 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 and daughter divorce though?
If a divorce is commenced then a husband or wife 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.
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 very often see these 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 a lot. The resulting 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 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 their son or daughter in law?
The answer is the pre or post nup.
These agreements are very 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 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, it is the pre-nup that 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.
Andrew Barton is a partner in the family law team at Stephens Scown in Exeter. To discuss any of the issues in this article, contact Andrew, please call 01392 210700 or email firstname.lastname@example.org