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NEWS - PLANNING
Divorce tips to ease the financial pain
3/7/2005
A few basic rules can save you a fortune when you and your spouse split up.
When engineer Cameron (not his real name) was awarded a 50:50 property settlement in divorce proceedings he was advised by his lawyers to appeal. He did. But after he was knocked back by the judge for wasting the court's time, the settlement was changed to give 51.5 per cent to his ex-wife and 48.5 per cent to him.
Cameron's divorce cost him and his ex-wife, Sarah, $45,000 each - a sizeable chunk of their assets. Had they kept it outside court, their costs would have been a fraction of that.
Divorce is renowned as an expensive business.
"The three quickest ways to destroy wealth accumulation are buying a boat, getting a hobby farm and getting divorced," says Rowan Wall, principal of Eclipse Financial Group.
"By the time the assets are divided into two there's not the same buying power," Wall says. Those assets include the family home, investments and superannuation.
Australia has one of the highest divorce rates in the world, topped only by the United States and Britain. Out of every 1000 Australians, of all age groups, 2.8are divorced, according to a recent Australian Institute of Family Studies report.
The Australian Bureau of Statistics says 53,100 divorces were granted in 2003, up 10percent compared with a decade earlier.
But that has not stopped us from remarrying - almost one-third of marriages in 2003 involved at least one partner who had been married before. So is there a way to part company without huge legal fees? It is important to find out because the stakes became higher in December last year.
Now, says Marilyn Hauptmann, a partner in family law with Swaab Attorneys, the Family Court can sometimes go after third parties for linked assets in a property settlement.
That means business partners, family trusts and even the bank are open to court orders. "For example, if both parties are jointly liable for a mortgage with a bank, the Family Court can make an order against the bank that it can go after only one of the parties of the marriage for money due under the mortgage," says Hauptmann.
There is a procedure for ensuring that any orders are fair to a third party.
"The changes are scary. The courts have got much more power. Now every business you go into, your business partner is going to be at risk and could be forced to incur huge legal costs," she says.
One solution is to set things up with a pre-nuptial contract. They have been legally binding since December 2000 but many question if the effort is worth it because of several loopholes.
The two biggest are failure to disclose assets and changes in circumstances, says family law specialist Robert Benjamin, a partner with Watts McCray.
So if one partner doesn't disclose all his or her assets at the time of the pre-nup (also called a binding financial agreement) it can be declared null and void. A hidden share portfolio or investment property, for example, could make an agreement worthless.
"A change in circumstance may be if two high-powered executives marry and the wife has a stroke and can no longer work," Benjamin says.
"The agreement would no longer stand - and rightly so because previously the husband wasn't going to support her and now that she's incapacitated it's fair that it changes.
"Or if a couple are not planning to have children and the wife has triplets and can't work, that could be considered a material change in circumstances."
So if you want your pre-nup to stand up, get it changed when your circumstances do. It is the same logic as is applied to a will.
Pre-nuptials become more important for those entering second or third marriages.
"Often when people have been through a marriage break-up," says Benjamin, "they realise how susceptible they are to adjustments to property - particularly now that superannuation can be split.
"Someone might say, 'Yes, I do love you, but I really want my assets to go to my kids, not to you and your kids'. Also, in second marriages they're often a lot better established financially."
The first step to a pre-nuptial contract is to work out what assets you both have, and then get advice as to what would be a fair split.
"People tend to reach agreement better this way," Benjamin says.
"Inevitably your views [on property division] before marriage are going to be significantly different to those after catching your spouse playing around with someone else."
Legal fees for an amicable divorce with simple assets could be as low as $1500 each, he says.
Get advice not only from a solicitor but also an accountant because inevitably there are tax complications. Take a divorce where some of the assets are locked into a company. While the law allows a share in a company to be transferred between spouses free of capital gains tax, there is no such relief if the company transfers assets to a spouse as part of a settlement. In that case the proceeds are an unfranked dividend, and tax is payable.
"Often there is so much value inside companies and not enough assets outside," says accountant Les Szekely of Horwath Sydney.
"Say the family home is worth $1 million and the company is worth $5 million, making the property settlement $6 million. How do you give one party half of that without having to take value out of the company?
"Even if the company has cash or non-business assets that could be transferred to one of the spouses, this would be treated as a taxable distribution by the company," Szekely says.
One way of letting a smaller slice go to the taxman is to set up a trust for minor children as part of the divorce settlement for maintenance.
"The advantage is trust income [in the hands of children] is taxed at adult rates not minor rates," says Szekely. Normally, children's income above $416 is taxed at punitive rates as high as 66 per cent.
Another way to avoid massive legal fees is to seek expert advice from the judges themselves.
Financial planner Rowan Wall is not a great believer in pre-nups - instead he might suggest clients see retired Family Court judges to decide on an equitable split.
"There are a whole lot of retired Family Court judges who make a living sitting down with people and telling them what the courts are likely to decide," he says. "The judge says, 'This is how I would award the split', and there are no lawyers firing people up."
This costs about $500 an hour. Consultations usually last three or four hours. Once the report is written up, the total fee is about $2500.
Reproduced from the Australian Financial Review - 7 Mar 2005
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