How to Protect your Family’s Wealth During Divorce
Are parents liable to be financially affected by the divorce of one or more of their children?
Some of the latest official statistics on divorce in the UK make for interesting reading, perhaps not just for those directly affected too.
Here are two to focus on; First off the latest available numbers suggest that around 42% of all marriages end in divorce. Second the average ages at which couples get divorced are 45 for men and 42 for women.
The financial implications for those couples around that age group are clear: divorce is often occurring at a critical stage of people’s lives. The 40-50 years are arguably the most important accumulation years for an average couple. This is the period which has the most impact on how much money an individual will have in retirement.
A divorce can cause havoc with financial planning at such junctures. However, this average age of divorcing couples perhaps presents an even bigger financial planning aspect: the bloodline consequences…
What about the unintended consequences for the parents of the divorcing couple?
A 45 year old man and a 42 year old woman are very likely to have one or both parents still alive. Parents who will probably be in their seventies or eighties; parents who may be considering how to pass their wealth down their bloodline.
Looking at the divorcing issues, strictly from a financial planning point of view, this leads to an interesting consideration; in many cases the people who could be most affected by a divorce are the parents (or parent) of a divorcing couple.
This is because the ex-wife or ex-husband could easily have a call on the estate of their parents-in-law. This is not a subjective consideration, it happens and happens regularly.
Imagine a couple in their eighties who gift funds to their son to help with a property purchase or school fees or simply to pass money through their bloodline. They do this is 2015 and in 2016 the son is then subjected to a divorce; from there the ex-wife becomes entitled to a share, probably a big share, of this gift.
Did the parents intend or want their wealth to end up with an ex-spouse? In most cases the answer will be an unequivocal “no” – but this is what will happen if certain protective steps are not taken in advance.
There are many variations on this scenario, but hopefully the wider point is made by whatever example is given.
Elderly parents with two married children have, on average, a greater than 50% chance of one getting divorced. It is likely to happen.
An easy, protective measure against this financial risk:
What many people may not realise is how easy it is for parents to protect against these potentially negative financial outcomes occurring in the future. Relatively simple measures can be taken to lower this risk to a family’s finances. Like any good financial planning or protective measure it is a win/win position.
Any wealth (e.g. money, investments, and assets) can be subjected to a trust wording which provides for a future divorcing scenario – the wealth can be secured within a trust arrangement which effectively ensures that it passes through the bloodline.
This is no way disadvantages the daughter-in-law or son-in-law; the same outcomes can occur as before. The only difference by using a simple trust structure is that the position alters should a divorce occur at a future date and because of the trust the wealth remains with the family member (the son or the daughter, not the ex-spouse – the former son-in-law or daughter-in-law).
Getting such a trust structure in place is easy; it does not require any complicated arrangements or overtly expensive steps. It does not involve tying wealth up in a restrictive fashion or any form of self-deprivation.
The trust solution can work on more than one level:
The trust arrangement can have multiple benefits; it can help with more than just protection against divorce, for example it can also help protect assets against a son or daughter facing a bankruptcy and can be tax efficient in a broader sense (for example reducing future Inheritance Tax liabilities).
The financial effect of a divorce can be dramatic and not just on the couple. Clearly their children can be affected but so can their parents. In the case of the parents this can be alleviated by some effective forward financial planning.
For anyone looking at how they will pass their wealth down to their children, this must be relevant if one or more of those children are married.
The statistics show quite clearly that this isn’t some farfetched possibility, which only happens to an unfortunate few. Nearly one and a half million divorces have occurred in the past ten years in this country. However regrettable it may be, it is one of the more likely financial considerations many people will have to face – at some stage.
If it causes a financial issue, it didn’t have to.
Get in touch here to find out more about how you could protect your family’s wealth from divorce.