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NEWS - PLANNING
Divorce unmasked
3/25/2002
This year about 100,000 Australians are likely to grapple with the consequences of divorce and fight for a decent share of marital assets amid emotional distress.
It is important to ignore the turmoil and start splitting assets long before a divorce is finalised. Those who delay property settlements risk being left destitute, or may become the victim of dirty tricks played by their ex-spouse.
Take John for example. As a director of his own company, John had transferred the family home into his wife's name a few years ago. When his marriage broke down, his wife sold the house before property negotiations had begun.
Or consider Fiona. Her husband had transferred the house into her name years earlier, and later asked her to sign a mortgage facility. When it was obvious that the marriage was failing, he took out a $250,000 mortgage on the home. Fiona had to find out where the money had gone to get it back into the pot of marital assets, or face a property settlement in which there was $250,000 less to share.
The lesson from John's and Fiona's experiences is that it's crucial to start a property settlement, as distinct from a final divorce, as soon as possible. Even delays in a friendly split can cause financial problems.
Kath wanted to keep the matrimonial home as part of her divorce settlement. The house was worth $650,000 when she split from her husband, but shot up in the Sydney property boom and was worth far more when property settlement began 12 months later. This meant the home took up much more of Kath's percentage of the settlement, and she got less of other assets acquired during the marriage.
These problems are becoming more common. There were 1.1 million divorcees in Australia at the end of 2000 and the likelihood of a marriage ending in divorce is increasing, according to the Australian Bureau of Statistics.
If you become one of those statistics, careful planning will increase your chance of getting an equitable share of the marital chattels.
"Couples have to wait for a year after separation to apply for divorce but can commence court proceedings for property orders immediately," says a family law specialist, Marilyn Hauptmann, from Sydney-based Swaab Attorneys.
"The idea is to get your property settlement resolved as quickly as possible. I have clients who come for one meeting and then lack the motivation, or perhaps courage, to go further. They come back in six to 12 months and are in a much worse position."
A delay in a property settlement not only lets an ex-spouse delve into joint assets, but lets him or her claim part of the assets you have acquired since separation.
"I've had a client who separated 20 years prior to the property settlement. She had acquired a number of assets in that time and these had to be considered by the court," Hauptmann says.
This is because the Family Court has to consider the assets held by both parties at the date of a property settlement hearing, rather than at the date of separation.
Hauptmann says you are likely to keep the majority of assets acquired after the separation, particularly if they are bought with resources generated since your split, but your ex-spouse may have a legitimate claim to some of those assets.
These laws govern all Australian married couples but do not apply to de facto relationships or same-sex couples. De factos and same-sex partners are reliant on state laws when seeking to split assets acquired during a relationship.
New federal laws also allow married couples to plan for the possibility of divorce during their relationship, and avoid costly Family Court battles if their marriage does break down. The laws let couples make binding private financial agreements before a marriage, during the relationship or when it ends, says Nigel Nicholls from family law specialist Stuart Fowler and Partners.
Nicholls says the agreements are most useful for older couples who have acquired substantial assets before a marriage, rather than young people who have few assets.
"Financial agreements might work, for example, for people entering into a second marriage who want to retain the assets they bring into the marriage and divide only assets acquired during the marriage if they get divorced," Nicholls says.
He says the difficulty younger people face is predicting how their life will change over the course of a marriage. "It's probably too far in advance to make arrangements about what will happen if you separate. Children might come along and alter financial plans, or the marriage might last five, 10 or 20 years."
A potential downside of striking an agreement outside the Family Court is that it could create capital gains tax liabilities for an unwitting party.
Capital gains tax rollover rules allow assets to be transferred between divorcing couples without any CGT accrual, says a partner with PricewaterhouseCoopers, Paul Brasil. However, the property transferrals have to be part of a court order for the rollover relief to apply.
The other option is to calculate any CGT before signing a final agreement with an ex-spouse, and to deduct it from his or her share of the assets.
A good financial adviser would help with this task, and with other aspects of a divorce.
Sydney-based adviser Rowan Wall from Eclipse Financial Services suggests it is possible to avoid Family Court proceedings or hefty solicitor's charges by calling on a neutral family friend or a retired Family Court judge to act as mediator.
"We find someone totally impartial to help with negotiations. A retired judge, for example, can suggest what the Family Court will award each party."
The idea is to take the emotion out of discussions and potentially save thousands of dollars in legal bills, he says.
In spite of the need to prepare properly for divorce, plotting to get the most out of a property settlement will get you only so far. It is virtually impossible, for example, to hide assets in companies or family trusts because the Family Court has the power to consider those assets in its financial analysis of a marriage.
"Assets created during a marriage, with the resources of a marriage, are subject to Family Court orders, regardless of the structure in which they are held," says solicitor Peter Bobbin from The Argyle Partnership.
But trusts that are not created with marital resources and maintained outside a marriage could be exempt from those orders. "A testamentary trust set up by a person's parents has a reasonable degree of protection when assets are divided between a couple," Bobbin says.
If the spouse who is a beneficiary to the trust is disciplined and uses it to pay only for costs like school fees, then there is a good chance its resources will not be taken into account in a divorce settlement, he says.
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