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Protecting Inherited Assets Against Family Law Claims

Case Study

Jane’s only significant asset is her primary residence, which is a modest 2-bedroom apartment worth $800k. Jane leaves everything to Mary who is her only child. Mary has a job paying $120k p.a. and 2 children who are still in school.

Mary lives in a 3 bedroom townhouse, which she rents as she can’t yet afford to buy her own home. Once Jane’s apartment passes to Mary, to help pay the bills, Mary rents out Jane’s old apartment as an investment property, which earns $40k p.a. in rental income.

Mary holds Jane’s apartment as an investment property for 10 years and then sells it for $1M, making a $20k capital gain on the sale.

To see the tax rates that apply, look at the following table in the “Testamentary Trust’ column, where you can see the rates are the same as the normal adult rates. With a smarter will, those rates can also apply to children under 18 years old who otherwise have no income.

Case Study

Jane’s only significant asset is her primary residence, which is a modest 2-bedroom apartment worth $800k. Jane leaves everything to Mary who is her only child. Mary has a job paying $120k p.a. and 2 children who are still in school.

Mary lives in a 3 bedroom townhouse, which she rents as she can’t yet afford to buy her own home. Once Jane’s apartment passes to Mary, to help pay the bills, Mary rents out Jane’s old apartment as an investment property, which earns $40k p.a. in rental income.

Mary holds Jane’s apartment as an investment property for 10 years and then sells it for $1M, making a $20k capital gain on the sale.

To see the tax rates that apply, look at the following table in the “Testamentary Trust’ column, where you can see the rates are the same as the normal adult rates. With a smarter will, those rates can also apply to children under 18 years old who otherwise have no income.

Asset protection against Family Law claims

Based on this case study if Mary, Jane’s beneficiary is involved in a marriage or de facto relationship that breaks down, then Mary’s former spouse may make claims against Jane’s apartment. The Family Court of Australia has broad powers to divide the beneficiary’s property between the spouses and require the payment of maintenance (i.e. alimony).

By placing her assets in a testamentary discretionary trust it may help to insulate Jane’s hard-earned asset from such claims. This is because technically the trust owns the assets and, as it is a discretionary trust, the beneficiary (Mary) does not have a fixed entitlement to the assets.

QLD Law Group’s Estate Planning and Family Lawyer Simon Pattison can assist with ensuring your assets are protected as per your wishes. Contact Simon today on simon.pattison@qldlawgroup.com.au or 3226 1733.

Please note: This guide should not be relied on as a substitute for obtaining legal, financial or other professional advice. This case study is intended to provide a general example in relation to income tax only and is not comprehensive. Other taxes also need to be considered – e.g. GST, stamp duty, land tax, etc. You must seek your own tailored professional advice.

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