This is a story about a financial planner and accountant who worked together to assist their client achieve great financial success throughout his lifetime. To the credit of the financial planner and accountant the client exceeded his financial goals at the age of 50 (and the client was very pleased). The client unexpectedly went into cardiac arrest shortly after and could not be revived.

The client was survived by his two children and had made a simple Will which left everything to his two adult children. At the time of the client’s death, one child was bankrupt and the other was contemplating a separation from her husband. This is an unfortunate story of how the client’s assets were partially lost to the trustee in bankruptcy and the to be ex-spouse.

It’s a pity the client didn’t ask their financial planner and accountant about what happens to their wealth after they die and how to protect it.

For the child who was bankrupt:

  • The client could have incorporated a testamentary trust into his Will to provide protection for his daughter in the event she was or may become bankrupt and is particularly important where the beneficiary carries a commercial risk, such as ownership of a small business where there is always a risk of loss.
  • The testamentary trust (if structured correctly) could have prevented a substantial amount of the inheritance going to his daughter’s creditors as the inheritance would not be passed directly to the beneficiary but instead to the nominated trustee of the testamentary trust who would have the power and discretion to not distribute to a beneficiary until the threat (bankruptcy) is removed.

For the child contemplating a separation from her husband:

  • The client could have incorporated an appropriately structured testamentary trust into his Will to limit the inheritance for his child being lost to her husband.
  • Rather than the inheritance passing directly to his child but instead to the nominated trustee of the testamentary trust, the trustee will have the power and discretion to delay, withhold and distribute the benefit of the income and capital from the testamentary trust for the beneficiaries (which may include the client’s grandchildren).
  • Family law is not straight forward and the property orders will depend on a number of factors including when the inheritance was received and what contributions (both financial and non-financial) each party has brought to the relationship.

It is most likely that the best way to reduce the loss of the inheritance is through an appropriately structured testamentary trust in his Will. This may be regarded by the Court as a “financial resource” of his child rather than “matrimonial property” (matrimonial property being available for division between the child and her husband).