How to protect financial gifts to children in the event of divorce or separation

In the current financial climate it is becoming more and more common for parents, or other family members, to gift their children or grandchildren money, often to help them get onto the property ladder. As a parent it is reassuring to be able to help your children. For some people having to think about potentially taking steps to protect that gift can seem unpalatable. However more and more donors of gifts are seeking advice as to what steps they can take to try to protect the gift from attack in the future.

How are financial gifts treated as part of a divorce or separation?

Parents are often concerned about whether it is possible to ringfence any gift of money to their child. They are keen to understand what would happen if their child married and then divorced – would that money become part of the matrimonial pot and be shared between the couple? What would happen if their child lived with another person and used the gift to help purchase a property for them both to live in, and that relationship broke down?

These can be difficult conversations to have, however, they are likely to be easier at the time the gift is made, or in the early stages of their child’s relationship, rather than waiting until the relationship has come to an end. As lawyers we regularly try to untangle issues about money that was gifted or loaned from parents, and whether it should be returned or ringfenced. Courts tend to be very reluctant in the case of a parental loan or gift to ring fence that money, unless it is clearly recorded in a loan agreement or there is a charge. As a result considerable cost can be incurred in trying to prove loan or gift.

Can you protect money you give to your child?

If you are gifting money to your children, it is important to consider the scenarios outlined above at the outset. It is not unusual as part of tax planning for parents or older family members to want to give money to their children etc during their lifetime.

There are various steps which can potentially be taken. If you are making an outright gift, and your child is planning to or is already living with a partner, then a cohabitation agreement can clarify ownership of property, savings, and other assets. A declaration of trust will also record how any property is owned, particularly important where one party has made a greater contribution to the purchase price.

If the person you are gifting money to is planning to marry, then the best protection is to put a prenuptial agreement in place. Prenuptial agreements are persuasive to the court in the unfortunate event the marriage comes to an end and provide the best protection in those circumstances.

If your child is already married but you are worried about the possibility of the relationship breaking down in the future, or you are making the gift after they are married but want to ensure it stays in the family, then a postnuptial agreement gives protection.

Equally, the person benefiting from the gift or loan, may want to take steps to try to protect the money they are receiving from being the subject to a claim from their spouse or partner in the future. Our estate planning experts regularly assist with the creation of trusts for this purpose.

Every situation is different, and it is always important to take into account all of the circumstances in deciding the best approach for both the donor and the donee of the gift.