What’s mine is mine: Asset protection

16/05/2008


Whichever way you look at it, the end of a relationship is a painful and difficult experience for everyone concerned. Yet a break-up can also have tremendous financial implications – particularly if there are properties or joint debts to deal with. Justin Dowd from the Law Society of NSW explains how you can protect your assets from the outset

 

For those who hold substantial assets, breaking up with a partner can be further complicated by concerns about the financial consequences, as well as issues of succession. For example, you may wish to leave property to your children from a previous relationship.

 

How, then, can you protect your assets when you’re contemplating either marrying or living with a partner in a de facto relationship?

The law

At the present time, different laws apply for marriages and de facto relationships. If you’re married, then the issues are governed by the federal Family Law Act. If you’re in a de facto relationship, then state law applies, and this varies between states and territories.

 

There have been calls for a uniform law to apply for the whole of Australia, but the federal parliament hasn’t yet considered legislation to achieve this, so it’s unlikely to happen any time soon.

 

When courts are dividing the property of married couples at the breakdown of a relationship, they generally treat the marriage as a social and economic partnership. The courts look not only to the contributions that each person has made to the relationship, but also to their future needs, and the needs of any children.

 

What if at the beginning of a relationship you have significant assets, including investment property?

 

The courts will take into account who brought the property into the relationship; however, typically the longer the relationship lasts, the less significance is given to prior ownership of the property.

 

Similar principles are usually applied to de factos under state laws; although in some states the courts can only consider past contributions, not future needs.

 

State laws give the courts the power to alter property rights when an unmarried couple has been together for a certain period of time, or other grounds may apply.

 

The normal rule in every state and territory except South Australia is that if the parties have been together for at least two years, the courts have the power to make orders in relation to the assets of the parties. In South Australia, however, this period is three years.

 

Other grounds are typically that a child was born to the relationship, or that one person has made substantial contributions to the other which wouldn’t be adequately compensated if the courts didn’t make an order.

 

Protecting your property

It’s possible, however, to come to an agreement about what will happen to your assets if you split up, whether you get married or not. There are two main ways to make an agreement.

 

Option 1: Quarantine

The first option is to come to an agreement that any property brought into the relationship won’t form part of the property for distribution if the two parties decide to separate. For example, you could agree that your investment property, and any inheritance you receive, will be yours and yours alone. Any assets that you acquire together in the course of your relationship can be divided in accordance with the usual principles that will apply to the circumstances that exist at the time of separation. The property that you bring into the relationship will thereby be ‘quarantined’ from division.

 

The problem with this arrangement is that it doesn’t necessarily protect your interests very well. The courts may not make orders in relation to the property that’s been quarantined, but it may choose to give more of the jointly acquired assets to your former partner, because you have the investment property or inheritance.

 

Option 2: Comprehensive agreement

The other agreement option determines how all of your property will be divided on separation, whether you own it now or will acquire it in the future.

 

Such an agreement is certainly preferable in terms of making comprehensive arrangements in the event of a relationship breakdown.

 

It can be very difficult to predict what your circumstances may be in the future. An agreement which may look fair if there are no children – for example that each party keeps whatever they brought into the relationship, and the rest is divided equally – may look unfair if a child is born to the relationship and one of you is the primary carer of that child.

 

It’s also hard to anticipate future events. For example, what if you become disabled and can’t work, and your partner has to take over the payment of the mortgage on your investment property? An agreement saying that the property will always remain entirely yours may seem fair at the time, but can become unfair as a result of this change in circumstances.

Benefits and pitfalls of agreements

The problem with making agreements about how you’ll divide property in the event of separation in 10, 20 or 30 years is that an agreement can be a double-edged sword.

 

Although an agreement can protect your assets, it can also be the cause of self-inflicted injury if you’re the one who would end up being disadvantaged, in light of subsequent events or change of circumstances.

 

The great advantage of having such an agreement, however, is that it provides some certainty in the event of a relationship breakdown. Yet, as mentioned before, nothing can be assured, since the courts have the power to set aside agreements in certain circumstances.

 

Nonetheless, a fair, properly drafted agreement which fulfils all of the requirements of the legislation should withstand scrutiny in later years, as long as there are no exceptional circumstances which would make it subsequently unfair, and there are no changes to the law that affect the agreement.

 

However, such agreements require full disclosure of all assets of both parties, and are most effective if they take into account all of the foreseeable circumstances that could arise in the future. Therefore the drafting of a comprehensive agreement can be time consuming and expensive.

Drawing up an agreement

If you wish to have an agreement drawn up about what will happen to your property if your relationship breaks down, you’ll need to see a family lawyer.

 

The other party to the relationship will also need to receive independent legal advice.

 

Of course, this situation may seem rather unromantic – presenting your beloved with a prenuptial agreement alongside the engagement ring may cast something of a damper on the celebrations.

 

It’s therefore important to consider the impact an agreement might have on your relationship.

 

If you’re planning a marriage, the golden rule is that such an agreement should be signed and sealed before the  wedding invitations go out, otherwise your partner may feel under unfair pressure to sign it.

 

In the event that the agreement specifies that property which is brought into the relationship should belong only to that person, it’s important to try to maintain separate finances in relation to that property throughout the relationship.

 

If, for example, you own an investment property, then the mortgage should be paid out of a bank account in your name, rather than out of a joint bank account. This will help avoid complications in the future.

 

You should also think about the legal title to property for inheritance purposes. If you have a joint tenancy, your partner will receive it all if you die first. However, if you have a tenancy in common, then each of you will be able to leave your half by will.

Final considerations

In certain situations, a carefully constructed trust could provide you with protection, as long as you’re prepared to give up all the rights of ownership and control over the assets, and you have trustees who’ll be completely independent from you.

 

In other situations, placing the property in the hands of a relative or friend may help protect your assets in the event of a relationship breakdown.

 

Trying to negotiate a legal agreement that will meet both parties’ needs can be a daunting and emotional experience.

 

But regardless of how simple or complicated the division of your assets may appear to be, it’s important that each couple has access to independent and unbiased legal advice.

 

If you’re unsure of who to contact in such a situation, the various law societies in each state and territory should be able to recommend a solicitor to suit your specific needs and requirements.

 

Justin Dowd is a Law Society councillor and family law accredited specialist. For further information, visit www.lawsociety.com.au

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