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Trust vs. Contracting Out Agreements

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Divorce or separation can be emotionally taxing, but it doesn’t have to be financially devastating. Two primary tools at your disposal are trusts and contracting out agreements. In this article, we’ll explain the differences between these options, helping you make informed decisions about safeguarding your assets.

 

Trusts: A Shield for Your Assets

 

A trust is a legal arrangement where one party (the settlor) transfers ownership of assets to another party (the trustee) for the benefit of specified individuals (the beneficiaries). Trusts can be an effective way to protect your assets in the event of a divorce or separation.

 

  1. Asset Protection: One of the key advantages of using a trust is asset protection. When assets are placed in a trust, they no longer belong to you but to the trust itself. This means that in the event of a divorce, these assets may not be considered ‘relationship property’ and may be shielded from division with your ex-spouse. This becomes a grey area though if someone has benefitted from trust assets, despite not being a beneficiary. This could include a partner that lives in a house which belongs to a trust and doesn’t pay rent.
  2. Control: While you may no longer own the assets in the trust, you can still exercise control over them by specifying how they should be managed and distributed in the trust deed. This allows you to ensure that your financial needs are met during and after a divorce.
  3. Long-term Planning: Trusts are versatile tools that can serve not only as divorce safeguards but also for generational wealth transfer and estate planning.

 

Contracting Out Agreements: Defining the Rules

 

A contracting out agreement, also known as a prenuptial or relationship property agreement, is a legal contract that outlines how property should be divided in case of divorce or separation. Here’s how it differs from trusts:

 

  1. Clarity and Certainty: A contracting out agreement is a clear and legally binding document. It defines the rules for property division, reducing the potential for disputes during a divorce. As things change over time however, it is important to revisit them as they can become out of date, and thus challengeable.
  2. Relationship Property: Assets that are already considered ‘relationship property’ (assets acquired during the marriage or partnership) cannot be protected through a contracting out agreement. However, you can protect separate property and specify how it should be treated in the event of separation.

 

Which Option is Right for You?

 

The choice between a trust and a contracting out agreement depends on your unique circumstances and goals:

Trusts are ideal for protecting a broader range of assets, providing control and privacy, and offering long-term estate planning benefits.

Contracting Out Agreements are effective for specifying how existing ‘relationship property’ should be divided, providing clarity and legal certainty.

 

Consultation is Key

Regardless of your choice, it’s crucial to seek professional advice from lawyers and financial advisors who specialise in family law and estate planning. We can help you understand the nuances of each option and tailor a solution that best suits your needs.

 

Conclusion

When it comes to protecting your assets, you have options. Trusts offer asset protection, control, and privacy, while contracting out agreements provide clarity and legal certainty. The right choice depends on your specific circumstances and goals. Seek expert advice to make informed decisions and safeguard your financial future.