Here are eight practical lessons about family law property settlement.
Family Law Property Settlement – Part 2
Property settlement is one of the three big battlegrounds when relationships break down – along with parenting and child support. If you haven’t yet listened to the last episode (episode 439), please start there.
In this second and final part of our mini-series on family law property settlements, Shannon Hilton of Velocity Legal will explore with you how property settlements are formalised and what really happens with trusts.
Here is what we learned, but please listen in as Shannon explains all this much better than we ever could. Please consult your family lawyer for specific advice. We are simply documenting the lessons we’ve learned, but we are not experts.
To listen while you drive, walk or work, access the episode through a free podcast app on your mobile phone.
Family Law Property Settlement
Here are eight crucial lessons we learned in this episode:
1 – Formalise Your Property Settlement
At the end of a relationship, there are three binding options for a property settlement (or two, if you count court and consent orders as one):
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Consent Order: You can refer the dispute to the court for administrative resolution by consent, ie, you both agree.
- Court Order: The dispute can be referred to the court for administrative resolution by court order if there’s a contest and the matter is pending proceedings.
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Binding Financial Agreement (BFA): You can enter a binding financial agreement at the start of your relationship to deal with a future division of your assets, during your relationship, or at the conclusion of it to formalise your settlement.
2 – Consent Orders are often simpler than BFAs
For a consent order, you don’t need lawyers. You lodge it with the court, and then the court decides.
For a Binding Financial Agreement (BFA), both parties require independent legal advice, which can make them more complex and expensive.
3 – Trusts Don’t Give You 100% Protection
Courts look past the legal structure of a discretionary trust and examine how it operates in practice. Control of the appointor role, patterns of distribution, and unpaid present entitlements (UPEs) all matter. A trust that consistently benefits one child can be treated as that child’s property or, at least, a financial resource in family law proceedings.
4 – How to Make Trusts Protect You More
These three things will give your trust a higher chance of surviving family court proceedings:
A – Have a joint appointor (as well as a joint trustee) with at least two other people, so you don’t control the trust.
B – Avoid a pattern of distribution, ie, don’t have the identical distributions year after year.
C – Avoid Unpaid Present Entitlements (UPEs).
A – How a Joint Appointor
Let’s say you have three children and are unsure about your son-in-law. So, you create a trust with a corporate trustee and make all three children directors (and shareholders) and also potential beneficiaries of this trust. This way, on paper, you think your daughter doesn’t control the trust, and hence, the trust wouldn’t be considered a family law asset. But you are mistaken.
It is all about the appointor. If your daughter is the appointor, she controls the trust. Therefore, you would have to appoint all three children as the appointors to prevent your daughter from officially controling the trust.
B – Avoid a Pattern of Distribution
A one-off distribution is better than the same amount spread over several years. So, AUD 500,000 once is better than AUD 100,000 every year for five years. Why? The AUD 100,000 per year could be considered regular income in family court proceedings.
However, also consider the Pattern of Distribution Test in the Trust Loss Provisions. Sometimes, Family Law and Tax Law pull in opposite directions.
C – Avoid a UPE
UPEs are an issue anyway. And definitely in the family court.
5 – Mortgage Might Not Protect You
Let’s say you lend your child money for a house deposit and secure it through a mortgage. This mortgage only protects your money and your claim to this money if you insist on the payment of interest and principal, hence making it a commercial transaction.
If you don’t do that, then no paperwork in the world will be of any help to you. The mortgage is likely to give your loan zero protection, and the money is basically gone when your child breaks up with their partner.
6 – Timing Matters
You might be divorced, but until you have the financial settlement, all cards are still on the table. The courts will consider any events that occur before settlement. For example, an inheritance received before settlement can significantly shift the outcome. The same applies to promotions, lottery wins, compensation payouts, and so on – they are all considered.
Delaying your settlement can work in your favour or against you. It just depends.
7 – To BFA or Not BFA?
Whether a binding financial agreement works in your favour depends on your current and future economic situation, as well as that of your partner.
To put it very simply, if you are poor and marry rich, avoid an agreement. If you are rich and your partner is poor, consider one.
8 – Gold Star Protection
The best protection against later partner claims is a financial agreement entered into at the start of the relationship, known as a prenuptial agreement. That is much safer than putting your assets into a discretionary trust or using a mortgage.
If you have significant assets or you loan a substantial sum to your child, be the bad cop and insist on your child and their partner entering a financial agreement.
These are the eight key takeaways from this episode. However, please listen in, as Shannon explains all this much better than we do.
MORE
Family Law Property Settlement Part 1
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.