‘When It’s Time To Finish Up’ - Navigating Broken Relationships and Untangling Assets’
By Danielle Hart and Jane Koelmeyer
Untangling assets after a broken relationship can be daunting. However, approaching the situation fully informed, and supported with financial and legal advice, in good health and with open communication can make the process more manageable, less costly and help ensure that your interests are protected.
Relationship breakdowns can be emotionally challenging, particularly at this time of year when holidays are fast approaching.
As an accounting partner and a family law specialist, we’ve both seen when emotions can cloud judgment and make it difficult to approach asset protection, and if required, a division. The holiday season can make this harder, but it’s a sad fact that for many couples, this is the period when it’s finally time to let go and separate your lives and assets.
So here are some pointers on how to do just that, calmly and rationally through a separation process.
The Most Difficult Aspect: Letting Go
Shared possessions often carry memories—both good and bad—which can make it hard to lose, or even keep, certain items. People can make decisions which make no financial sense. The cost of settling some disputes is disproportionate to the value of the issue or asset, so advice about when to let go can save you angst and cost.
Important decisions have to be made at this time. Approaching this task with your accountant helps to ensure that the overall impact of your decisions is clear to you: they can help ‘light up’ options to deal with these issues and help you understand what each might mean for you.
The First Step
To begin the process, a comprehensive inventory of everything acquired during the relationship (including assets and debts) must be taken. This includes:
Physical Assets: Real estate, vehicles, furniture, and personal belongings.
Financial Assets: Bank accounts, investments, and superannuation accounts.
Intangible Assets: business interests.
This helps provide a clearer picture of the “asset pool” i.e. what needs to be kept or divided – and it’s a critical step. Some people are very clear on what assets they have; others aren’t. But couples have a legal duty to exchange financial information, so transparency during this process is crucial and mandatory. Hidden assets can lead to complications, delays, protracted disputes and cost orders against parties who fail to honour their duty – even if it is an oversight.
This is why it’s important to maintain thorough records of all individual and shared financial dealings including assets, income, expenses and debts. These can be vital in ensuring a fair division and may be relied on if disputes arise.
Involving your accountant here is also important. They can help you provide information quickly and effectively. They can clarify ownership where different structures are involved and may already have structure charts that identify your financial assets. A shared early understanding of your assets saves you time and cost.
And it’s critical to consider the difference between the market value of assets versus the emotional value. The costs involved in 'winning’ assets with great emotional value can be considerable, so some perspective is important. Accountants can help clients to make this assessment.
Have a strategy around dividing assets
Sometimes, the traditional division of assets may not be practical, and people need to consider alternatives such as trading assets or cash settlements. This is where a financial strategy meeting with your advisors can be hugely valuable. They can provide advice about which assets you actually do need for your lifestyle and future financial needs, and recommend the most favourable pathway to minimise the impact of tax and other fees to your family and you.
Think through your legal position
When assets are involved, consulting a legal professional is necessary. Laws regarding asset division in Australia are applied with considerable discretion.
Understanding your rights after a relationship is crucial and you should get specialist advice early, so you know where you stand. Family law also looks at businesses, trusts and partnerships, as well as personal and other interests.
Couples and their families are unique and so you need to get advice about your particular circumstances. Further, the Commonwealth Parliament has just passed new laws for property settlement which are expected to be effective over the next six months.
A lawyer can help mitigate emotional stress by providing objective guidance before, during and at negotiations.
Consider mediation
Discussions about finances can be tricky if it’s already hard to talk. Trust your judgement. If you feel conversations might become contentious or unproductive, consider involving a mediator sooner rather than later. This can help ensure everyone stays on track, respectful and heard. It’s important that everyone remembers the intention is to find a resolution through a respectful conversation that allows both parties to move on. An accredited mediator can provide structure and help both parties reach an amicable agreement.
Protect yourself in other ways
Family law property settlements often occur in an emotional context. It’s important to recognise that the parties to a separation are making big financial decisions in the midst of emotional upheaval. It’s essential to make fully informed decisions, rather than decisions based on emotion alone.
Feelings of anxiety, distress or just being overwhelmed are commonplace, but that does not make them easier to manage or safe to ignore. If you are feeling overwhelmed by the separation, then talk to a health professional, like your doctor. It is difficult to make wise choices and decisions if you are unwell. Take care of your health at this time when you are making big decisions.
Please do not hesitate to contact us should you have any questions.
Wealth transfer isn’t just about ‘saving it up and passing it on’
By Danielle Hart and Jane Koelmeyer
There has been a lot of ‘noise’ in the media lately about the dilemma faced by many families looking to pass on wealth and assets from parents to their children. It’s clearly a concern for many families, particularly those who have different – and often divided – generational perspectives on why this should be done, and how to best do it.
As an accounting partner and a family law specialist, we’ve both seen how the wealth transfer process can work well, with inherited wealth helping family groups grow and thrive for generations. We’ve also seen how things can go horribly wrong, either through poor financial structuring, inaction or unwise decisions made around who should get what, and why.
Families aren’t like they used to be
Today’s families are complex, frequently involving second spouses, step-children, step- grandchildren and a wide variety of partnering relationships. The mechanisms to pass on wealth to these dependents are varied, can be complex, and frequently require clear communication, the right timing, right execution and unity amongst the family members, to be successful.
We often don't see both these accounting and relationship perspectives provided to clients as one strand of advice. So here are some useful points from us, to give you that combined perspective and hopefully help you and your nearest and dearest navigate a successful path through the intricacies of wealth transfer across the generations.
Get the financial structures right, from the start
It’s important to set up the right financial structures, early on, if you as the ‘wealth holder’ are planning to transfer your assets across your family.
Setting up either discretionary trusts or companies are both options that are worth considering as useful structures to hold any asset or investment purchased. As well as offering asset protection and flexibility for distributing income, these can also provide continuity when ‘control’ is transferred from parent to child. When these are properly set up, there is no sale or transfer of assets and the entity continues operating and investing as before, but with the next generation making the investment decisions.
Structuring your family home ownership as ‘tenants in common’ rather than joint ownership can be an important mechanism for passing ownership of the family home to children. In this scenario, once one tenant (owner) dies, their portion of the property can pass directly to their estate. Their will can then grant the surviving spouse a life interest in the home, so they can continue to live there. This helps to protect against the possibility that future partners of the surviving spouse might claim all or part of the property, instead ensuring that their children retain an interest in the home.
Many parents assist their children with cash and assets while they are alive to see their children enjoy them. But it’s important to properly document the intention and terms of this help. As a parent, you should consider who you want to help and on what basis. Is it a loan or a gift? Is it for your child, or your child and their spouse? A loan should be in writing, on commercial terms and complied with. Loans that do not meet this criteria are unlikely to be considered a liability.
Take a less taxing route
Minimising tax is also important in these situations. Again, having the right asset structures in place is critical here. Conversely, if the right structure is not in place, there can be significant capital gains tax and income tax liabilities that result.
Where assets (including businesses) and investments are owned via trusts and companies, there will often be no adverse tax outcomes when control is passed from parents to children. The children can be appointed directors when appropriate, and will already be general beneficiaries from when the trust was established. As the ownership of the asset is unchanged, there are no tax consequences.
Many people don’t consider the significant tax that can be payable to adult (non-dependent) beneficiaries who receive superannuation benefits upon the death of a parent. A member’s superannuation account is made up of both taxed and untaxed benefits. When these taxed benefits are directly paid out to a non-dependent, they are taxed at 15% plus 2% Medicare levy.
But there are ways to handle this: some strategies to reduce this tax include ensuring the benefits pass to an estate upon death, (not directly to the member), recontribution strategies, and ensuring all estate planning documentation is in order and includes permission to withdraw superannuation benefits for an incapacitated family member.
Managing those tricky interfamily relationships
Structuring is important, but it is not the only thing to get right. Family law – and lawyers – can look beyond the structure, and can alter these arrangements if necessary through the courts.
This requires thoughtful management and we would advise that when it comes to relationships and your financial future, 'hope for the best and plan for the worst’.
Relationship breakdown and the financial consequence is a material risk that should be managed. Here are some ways to do just that:
Before you advance money to your children: ask them to sign a financial agreement with their existing or future defacto or married spouse. This should confirm the terms on which you will provide financial assistance, and your requirements for repayment during your lifetime, after your lifetime or if their partnership/marriage ends. Clarify your intentions in your will also. A clear will and associated agreement will help to ensure your wishes are implemented in future.
Before you or your children move in or marry your respective partners: consider whether they or you need a financial agreement to document how things will be dealt with if your relationship does not endure.
Get good advice and get it early: If you are concerned about your relationship or the relationship of a child, consult a specialist lawyer and an accountant as soon as possible, to assess whether there is risk there and if so, how to manage the relationship.
While these conversations seem tricky, they are increasingly common and accepted discussions particularly among those who seek certainty and clarity. In our experience, couples and their families will prefer to do these to avoid the compounding effect of protracted, costly and uncertain litigation upon the pain of separation.
Divorces, wills and other legal instruments
Legal documents are useful things but often forgotten about when it comes to keeping them up to date. You should make sure that all legal documents reflect your current wishes and your current relationship status.
If you have separated from your married spouse, then you should obtain a divorce to sever the legal relationship. There are some good reasons for this, painful though it may be.
If you have separated, the legal relationship and responsibilities of marriage endure until divorce. Significantly, the provisions in a will appointing your married spouse to be the executor or a beneficiary are not revoked by your separation, even if you have formalised a financial settlement. Similarly, the appointment of your married but now estranged spouse to be your attorney in the event of your incapacity is not revoked by your separation.
If you are separated from your defacto spouse, you should get advice urgently about whether and if so how you should properly document that your financial relationship has ended, and revise your will.
Wills often get forgotten about in times of relationship turmoil. Clarify your wishes by updating your will and documents such as a power of attorney. If you intend to benefit your child and their spouse, notwithstanding their separation, then make your intention clear in your will. This will help to avoid uncertainty or painful controversy about who you really intended to benefit. In a recent case, the Federal Circuit and Family Court of Australia considered the circumstances in which a will maker had left gifts to both her child and her former child in law.
Our final top tips for the generations
Five top tips to bear in mind in these situations:
Five top tips to bear in mind in these situations:
1. Always consult your accountant when making investment and business decisions.
2. Before you hand over funds, check in with a specialist family lawyer and/or your accountant about how your contributions can be best protected.
3. Review your superannuation member statement to see if you are potentially gifting the ATO a small fortune on your death.
4. Ensure that your current relationship and wishes are clearly reflected in all agreements, wills and legal documents. Engage a specialist lawyer to review them regularly.
5. Plan ahead, always. Get advice early. Forewarned is forearmed.
Please do not hesitate to contact us should you have any questions.