Research carried out by wealth managers, Handelsbanken, shows that 67% of parents are unwilling to hand over any of their money to children early in case they get divorced and their son or daughter in law benefits. It also shows that 27% of parents do not believe that their children’s marriages will last and 27% say their children have already divorced or separated. Worried parents are now gifting only small amounts, or are giving gifts directly to their grandchildren, cutting out their children altogether.
With the wide belief that the coronavirus lockdown is the catalyst for a rise in the divorce rate, these worries are understandable. However, if you wish to help out your children financially, but want to ensure that their spouses or partners do not benefit, there are steps you can take to protect any investment you make.
Inheritance planning is vital
Making a will and carrying out inheritance planning is vital to ensure that you fully understand and make use of your inheritance tax (IHT) allowances and, should you wish to give gifts in your lifetime, that you do not fall foul of the rules.
Graysons’ lifetime planning experts can help you to make a will and set up trusts in which your children’s spouses wouldn’t be named as potential beneficiaries and, therefore, wouldn’t normally inherit. Anne Rogers, head of our private client team says:
“A trust could allow money to be passed out of your estate without attracting inheritance tax. It can also be used to buy property or make loans to beneficiaries. As trustees of any such trust, you can exercise control over how and when funds are used and can ensure that it is for the benefit of your children or grandchildren only. You can name trustees to continue administration of the trust after your death.
It is vital that you keep your will up to date. For example, if you fear that one of your children is planning to divorce, you may want to change your will so that this child is not a beneficiary and their spouse cannot, therefore, benefit from your wealth if you die before they divorced. Your will can be changed back once your child is divorced.”
Giving smaller, specific gifts of money to your children or grandchildren could allow you to help them financially and, at the same time, reduce your estate for the purposes of IHT, but you need to ensure that those gifts comply with strict rules or the gifts could still attract IHT.
Buying property with your children
If you decide to buy a house for your child or make a contribution to one, there are several things that you can do to protect your investment.
The property can be bought out of a trust that has been set up.
You can set up a declaration of trust with the child to whom you give/loan the money. This can state that when the house is sold, the amount of money you put into it will go back to your child – or to you if the money was a loan and not a gift. Your child and their spouse/civil partner or partner can also enter into such a declaration. A declaration of trust to protect the money of a third party (not the legal owner) needs the approval of a mortgage lender if there is one.
Buy the property with your child as tenants in common which means that you can specify the actual percentage of the property that you own so that when it is sold, you retain the same percentage.
Put a charge against the property (see below).
If your child is married or in a civil partnership, try to ensure that the property for which you have given/loaned money is owned as tenants in common and not joint tenants (where property automatically passes to the survivor) and that they have a will which specifies that their spouse/civil partner is not to inherit the house or any money that you gave them as a gift. If they do not have a will and are joint tenants, in the absence of any other agreement, such as those above, their spouse/civil partner will inherit the first £270,000 of your child’s estate, plus half of everything above that, in accordance with the rules of intestacy.
Caroline Murray, head of our property team says:
“In certain circumstances, we can put a charge on the property you are contributing to. This is a legal document (more watertight than a declaration of trust) that is registered against the property with the Land Registry. It is usually for a fixed amount or a percentage, with no interest accruing or payments to be made. The charge would be redeemed on a trigger event, such as the sale of the property. If there is already a mortgage on the property, the lender will need to consent to this charge.”
Prenups and cohabitation agreements
Your investment could be protected if your child enters into certain agreements with their spouses/civil partners or partners, such as a prenuptial agreement or a cohabitation agreement. Whilst these arrangements are voluntary, you could decide to make the gift/loan only if one of these agreements is in place. Bradie Pell, head of our family team says:
“If your child is getting married, a prenuptial agreement can address the gift or loan that you have given and what is to happen to it should they separate. Whilst prenuptial agreements are not yet legally binding in the UK, and so this does not offer 100% certainty that your money is protected, they are accepted more and more by courts as proof of a couple’s intentions. If the couple is entering into a civil partnership, they can have a pre-registration agreement drawn up in the same way.
If your child is living with someone, but not married, they could enter into a cohabitation agreement setting out what will happen to the couple’s assets should they split up. This way, whatever amount you have given or loaned to your child can be protected. If a cohabitation agreement is properly drafted, it is a legal document that is enforceable by law.”
Our private wealth team is well placed to help you with advice and assistance on many issues relating to wealth protection, including how best to help your children financially without risking your investment. Contact us now to arrange a meeting. You can also find out more about our bespoke services for high net worth individuals on our web pages.