Feb 27, 2019
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!