Besides the emotional turmoil of divorce or separation, the financial challenges of ending a major relationship can take a real toll.
Also read: How to manage your mortgage after a divorce
I spoke to Rachell Davey, partner in the family and relationship law group at Lander & Rogers in Melbourne to find out more about dividing your assets during a divorce, and how to hold onto your shares, property and other assets.
During a divorce, how does an asset like property typically get divided?
There is no such thing as a typical property settlement as every case is dependent on its own facts and circumstances. Family law is also quite subjective in that there are no hard and fast rules as to how property is to be divided upon a relationship breakdown.
Typically, the Family Court and family lawyers approach property settlements using a five-step process.
Firstly, we have to consider whether a property settlement is necessary. In most cases it will be but there can be scenarios where there is no need to interfere with the ownership of property (very short relationships etc).
Secondly, your lawyer and the Family Court will identify and value the asset pool, which is all of the assets that the parties own. This can include property, savings, investments, motor vehicles, businesses and superannuation.
Once we know what the parties own and how much those assets are worth, we then look at what the parties have done throughout their relationship and the contributions that they have made towards those assets. Contributions can be financial (earning an income) or homemaker and parent contributions—both sorts of contributions are treated equally.
Next, we look to the future and identify what the party’s future needs might be. To an extent, this involves some crystal ball gazing and there are a number of factors we consider but the two most important ones are the parties' income earning capacities and who will continue to have the care of children under the age of 18 years.
Finally, we take a step back from the proposed settlement and consider whether it is just and equitable. Essentially, we adjust the ownership of property based on the contributions that each party has made and their future needs.
Can you divide a property trust during a divorce?
A Trust, and property that is owned by a Trust can absolutely be taken into account when considering a property settlement as an asset of one or both of the parties.
The Family Court has the ability to look beyond the legal ownership of property and include assets that are held by a Trust or a corporate entity. For the assets of a Trust to be considered property of the parties, the Court looks to who has control of that Trust by considering factors such as who is the Appointor and Trustee, how the property of the Trust has historically been dealt with and who is able to control that decision making.
While assets of the Trust can be transferred or realised and distributed to affect a property settlement, this may give rise to serious taxation consequences. Usually one party will simply retain the Trust on account of their overall property entitlements and the other party will exit the Trust.
What happens during a divorce if one spouse owns a trading company?
Parties’ interests in corporate entities and businesses form part of the asset pool that is available to be divided between the parties during a divorce. The value of that entity or business must be determined, either by agreement, or by a formal valuation by a forensic accountant.
It is certainly not uncommon for parties to own and run a business together throughout a relationship. On separation, usually one party will want to retain this asset as part of their settlement. Alternatively, an agreement may be reached for the business to be sold.
It is rare for parties to continue to hold business interests together following separation and a property settlement, however that is a decision that parties can make if they choose to do so.
Do Prenups/Financial Agreements exist in Australia?
Financial Agreements have been available in Australia since 2000 for married couples and since 2009 for parties in a de facto relationship.
A Financial Agreement can be entered into at any stage of a relationship; before, during or after. They are essentially a private contract which allows people to decide how some or all of their property will be divided in the event of a relationship breakdown or divorce.
Are Financial Agreements iron-clad in the case of a divorce or separation?
Financial Agreements are recognised in Australia, as long as the very strict requirements contained in the Family Law Act are met.
Most importantly, before entering into the Agreement, both parties must have received separate and independent legal advice from an Australian Legal Practitioner as to the effect on their rights of entering into the Agreement and the advantages and disadvantages of entering into the Agreement.
Financial agreements are highly technical documents and great care and skill needs to be applied in their drafting to ensure that they are binding upon the parties and not susceptible to being set aside. They are not ‘iron-clad’—the Family Court can set aside a Financial Agreement in very limited circumstances.
How many Australians are signing Financial Agreements prior to a divorce?
Financial agreements are becoming increasingly more common, particularly as more people are aware of the benefits and certainty that a Financial Agreement can provide when it comes to dividing assets during a divorce.
Essentially, Financial Agreements are akin to insurance for your relationship. They provide both parties with certainty and security as to how their assets will be divided and dealt with in the event of a relationship breakdown or divorce.
Importantly, Financial Agreements ensure that people do not have to resort to litigation to achieve a fair property settlement which can be emotionally distressing, expensive and time consuming.
My law firm is seeing an increase in people seeking Financial Agreements who are involved in relationships later in life or subsequent relationships. These individuals wish to preserve their wealth for their children as opposed to an ex-spouse.
Financial Agreements can be tailored to the circumstances of the parties. For instance, by specifically excluding an inheritance or an asset such as a family business or to protect assets acquired through gifts or loans from parents such as a couples' first house.
What measures can you take before you get married to ensure that assets are divided fairly in the event of divorce?
The most important step that women (or anybody for that matter) can take is to educate themselves and stay informed as to their financial position, their spouse’s financial position and their overall financial affairs.
A relationship is not only emotional, it is financial as well. No one wants to focus on the financial aspects in the first wonderful stages of a relationship however appreciating the devastating financial consequences that relationship breakdown/divorce can bring is essential. The worst can happen—there is a one in two chance that a marriage will break down and that contingency needs to be considered.
When you start a relationship, you should be getting to know your partner emotionally but financially as well.
Learn about what they do, what they own, what their goals are financially. Talk about money as much as you can and make sure you have access to bank accounts and to financial documents and share your financial position as well.
If your partner doesn’t want to be open with you about their finances and their financial position, that should be a huge red flag. The most challenging and expensive property settlements that I deal with are ones where the client does not know what they own or have any understanding of their overall financial position.
To protect your assets in the event of a divorce, keep really detailed records of what you own and have evidence as to the value of those assets at the start of your relationship.
In Australia, we have a family law system where all property goes into the pool. Property that each of you own at the start of a relationship is not excluded but you will get credit for it, depending on how long your relationship is and the value of that asset at the start of the relationship.
Some quick tips:
If you own a home, consider getting it valued and have that valuation in your records.
Keep bank statements showing your savings, keep a superannuation statement showing how much you had at the start and records of everything else that you own.
If you're entering a relationship and you have more assets or a higher income than your partner, think carefully about a Financial Agreement. Financial agreements (aka ‘prenups’), like the name sounds, are agreements that detail the financial arrangements and the division of assets in the event of separation.
Finally, maintain your career. The most valuable asset that a woman can take from a property settlement and the division of assets during divorce is an income earning capacity moving forward.
Property settlements rarely provide sufficient capital for women to support themselves and their children moving forward, and it is for this reason alone that women continue to be significantly financially disadvantaged following a relationship breakdown.
When do divisions of assets start taking into effect? i.e. When does ‘what’s yours is mine’ take effect? How long do you have to be married for?
There is no time limit in terms of when one party to a marriage may be able to make a claim against the assets of the others.
Parties can be married for very short periods of time and still be entitled to a property settlement, however of course, this will depend on the circumstances of each case.
For those who are in de facto relationships, generally those relationships must have lasted for at least two years before a claim can be made. This does not necessarily mean that parties must have been living together for two years. People can be in de facto relationships without living together, this is just one factor that we consider.
There are exceptions to the two year limit. For instance, if there is a child born of the relationship, or if one party has made significant contributions to the property of the other, it may be possible to make a claim even though the relationship hasn’t lasted two years.
Also read: 5 tips to protect your finances from divorce
If you are concerned about dividing or keeping your assets during a divorce, seek professional advice.