Covering your asssssets in a relationship

Welcome to Finance & Fury’s, ‘Say What Wednesday’, where each week we answer questions from you all. This week our question comes from Tara;

 

“Hi Louis, what do you think are some financial considerations when it comes to a relationship?

- Should you have a prenuptial agreement?

- Shared bank accounts

- If you are looking to start a business together, what will happen if you break up?

And what are the laws in Australia in regards to this?”

 

Thanks Tara, that’s an awesome question because it’s really important to think about, for anyone entering into a relationship.

There’s the obvious factor; being on the same page as your partner financially is sometimes easier said than done. I’ll do a future episode to cover off on this and include strategies to work on together financially to ensure you’re on the same page. But today, let’s look at the legal / protection side. By the way, this comes with a big disclaimer – I’m not a lawyer! This is not legal advice, just general discussion around what constitutes relationship in eyes of law, what happens when you separate, and ways to protect yourself, or your business.

 

Let’s start with the definitions.

You have ‘De facto relationship’ or ‘Married’. And in fact, there has actually been little difference between them since approximately March 2009 as the courts deal with financial matters in much the same way.

The law has formulated a set of factors to determine whether a couple are (or were) de facto or if it is less-serious. This takes into account: How long the couple have been together in their relationship, and if the relationship is sexual in nature Whether there’s financial dependency and mutual commitment to a shared life Property ownership and use; Care and support of children; In summary, a de facto relationship is a relationship in which a couple lives together on a genuine domestic basis for 2 years (without separation), however there is an exemption if there are children or substantial contributions to joint property This applies to same or opposite sex partnerships and we see the same laws across all states and territories in Australia. Also, a tip for you players - You can also be considered to be in more than one de facto relationship at a time

If you’re in a short-term relationship (under two years) and you keep your bank accounts separate, there’s no financial dependency, there’s no kids or home together, you’re okay. It’s pretty straight forward. Generally, by law you’re not considered in a relationship and therefore there’d be no separation of assets if you were to break up.

If you are already married or in de facto relationship there’s little that you can do after the fact in a lot of cases – beyond hiding money.

 

Protecting yourself

First, take a look at the end game – what happens in separation? You can look at each potential outcome and work backwards from there, to figure out the best way to protect your assets.

When looking at how courts would split assets, there’s actually no specific formula used to divide assets and property so no one can tell you exactly what orders a judicial officer will make.

A decision is made after all the evidence is heard and the judicial officer decides what is just and equitable based on the unique facts of your individual case. The Family Law Act 1975the general principles the court considers when deciding financial disputes include; what you've got and what you owe – valuations and asset position (net worth) direct financial contributions by each party to the marriage/relationship (salary earnings, investments) indirect financial contributions by each party (gifts and inheritances from families) non-financial contributions (caring for children and homemaking) future requirements (age, health, financial resources, care of children and ability to earn) The way your assets and debts will be shared between you will depend on the individual circumstances of your family … and every settlement is different So, in practice, this doesn’t help very much in ‘planning to protect yourself’, which is partly my point – nothing is off the table! If you are already in a relationship and then start a business or accumulate wealth, it becomes harder to protect. This includes access assets in Family Trust, or in superannuation. As an example, we can take a look at Jeff Bezos who started Amazon in 1994, after he married his wife in 1993. She might now become the richest woman in the world as a result of their separation.

 

Back to Tara’s question!

The Prenup – what you can do

In Australia they are called ‘Binding Financial Agreements’ (BFA) This sets out the way some or all of a couple’s assets will be divided in the event that their relationship breaks down. It can also deal with spousal maintenance. A BFA can be signed at any point during a relationship, but it is preferable that the agreement is put in place before getting married or entering into a de facto relationship (i.e. living together).

Protecting wealth – how does a BFA stack up?

It is important to consider a binding financial agreement when:

you have more money, property or assets than your partner at the beginning of your relationship you may, at a later stage, be entitled to an inheritance or large gift you operate a family business or investment that you need to preserve you want to ensure the terms of any property division are agreed up front to avoid going to court later you are forming a new relationship and you have children who need to be protected financially.

Is a BFA actually binding?

One of the key issues in executing your binding financial agreement is to ensure that it is in fact, binding. Binding financial agreements need to be carefully drafted to ensure they consider any structures in place, such as family trusts, companies and self-managed super funds, as well as tax implications and any other obligations. A BFA must be drafted to ensure it meets all of the many legal requirements and in a way that means it will be upheld in the future if challenged. If your partner has asked you to sign a binding financial agreement, you must obtain independent legal advice, preferably from a lawyer specialising in family law, before you sign. The intended effect of a BFA is to remove a Court’s jurisdiction to adjust a financial settlement. It must be carefully and accurately drafted, with full disclosure of all relevant circumstances, avoiding duress

When things go wrong  

Failure to comply with the formal requirements of section 90G (bits of legislation, I won’t read them out) Because it was obtained by fraud (including non-disclosure of a material matter); Stoddard & Stoddard - Court held the omission of material matters constituted fraud, even in the absence of deliberate deception. Intention to commit fraud was not necessary (slips mind) - the BFA could be set aside on this ground Because it was obtained under duress: One Case – The wife arrived in Australia on a student visa in mid-2001. The parties lived together from late 2002 until mid-2003 when the wife returned to Thailand because her visa had expired. The couple became engaged and the husband sponsored the wife’s return to Australia in mid-2004 on a fiancée’s visa, the terms of which required the couple to marry by January 2005. The wife fell pregnant in July 2004. The parties entered into a Binding Financial Agreement on 11 November 2004 and married on 14 November 2004. On 16 November 2004 the wife (in accordance with plans made prior to the marriage) returned to Thailand to visit her family. The parties separated in April 2007. The wife was pregnant, unmarried, and facing expulsion from the country if she was not married by January 2005. It was accepted by the Court that the husband had told the wife that ‘the marriage is off’ if she did not sign the BFA. Compounding the situation was the fact that two days after the planned wedding, the wife was scheduled to return to her family, in circumstances where she had anticipated being married, but would be returning to her family unmarried and pregnant if the marriage was cancelled. Court accepted that ‘pressure placed on the wife by the husband to sign was “illegitimate”. Because the husband’s conduct was unconscionable the BFA was set aside. Unconscionability arises where one party suffers a ‘special disadvantage’ and that disadvantage is taken advantage of by the other party. This also relates to the previous case. These cases highlight the pitfalls of not properly complying with the technical requirements of the Act, and of attempting to enter into a binding financial agreement with anything other than good faith and candour.

How to get a BFA

Get one through a lawyer – it is essential that an experienced lawyer draw up a BFA for you Costly - $6k lowest I have seen – average $12k – And they’re not iron clad!

 

The other part – Starting a business

Buy sell agreements/shareholders agreements are important Include in the Buy/Sell Agreements what will happen if your relationship breaks down – can you continue working together? or if you’re completely separate, what happens to the business? One Party would normally buy out the other party. They have an agreement on timeframes, and process, as well as valuation options. If you and your ex own shares in a business, the business is normally valued for the purposes of the financial settlement Either agree on a value if it is amicable, otherwise, use independent valuers (I have seen this cost between $4k-$12k) Values depend on assets (stock, property), earnings (profits or multiples of revenue), Structure (company, sole trader etc) If the agreement says 50/50, then you would split the shares Note – I don’t believe these agreements are 100% water tight If all your money/finances are in the business and the settlement figure is larger than what you own personally you may be required to sell or gift additional shares to cover settlement These agreements are important for anyone with a business partner, whether you’re in a relationship or not. They do cover things Death/Total Permanent Disability for which you can set up insurances to provide funds to buy out company shares.

 

Long story short

The best thing to do is to not be in a relationship with someone who will take you to the cleaners! Don’t mix finances until you are pretty certain (though it doesn’t matter after 2 years living together, or you have kids, or you’re married)

Get into a relationship with someone you trust. This seems obvious. But you’ve really got to match up, which is not a given – I encourage you to talk about money together if you are really serious about the person with whom you’re in a relationship.

Thanks for the question Tara! If anyone else has got questions, please head to financeandfury.com.au and hit us up on the Contact Page.

Until next time, have a good one!