Can’t we just split everything without a formal agreement?
Why do you need a Financial Agreement or Consent Orders?
We often have clients ask us why they can't just settle their property matters without resorting to a Financial Agreement or Consent Orders, if we agree can't we just split up all the assets? There are a couple of problems with this approach including Real Estate and Stamp Duty, Superannuation, Estate Planning and lack of Finality.
Under ordinary circumstances any time that you transfer real estate you will pay stamp duty on the full value of the property, not the equity after the mortgage but the full unencumbered market value of the property.
The website Domain has the median house price at $995,804 and median apartment price at $656,166. If you and your partner purchased one of these properties, fully mortgaged, and then after five years you split up with your partner after paying off some of the mortgage then normally one party will want to buy the other party out.
So if at the time that you split up y our apartment that you purchased for $656,166 was worth $800,000 and you owed $550,000 on the mortgage, then you have equity of $250,000. If you and your partner agreed to a 50/50 split, your partner would pay you $125,000 and transfer the property and the mortgage to themselves.
Each of you probably feels like you are getting $125,000 from this transaction, but the value of the property for stamp duty purposes is $800,000. If you didn't have a Financial Agreement or a set of Consent Orders, then the stamp duty on the half that is transferred ($400,000) is $13,490.
If you have a set of Consent Orders or a Binding Financial Agreement, then you will attract a stamp duty exemption for a property settlement relating to the break down of a de facto relationship. You cannot apply to the Office of State Revenue for this exemption in a de facto relationship without a set of Consent Orders or a Binding Financial Agreement.
If you want to calculate the stamp duty on a transaction then click on this link.
For many people superannuation is a large part of their asset pool, but they cannot access it yet.
You cannot under ordinary circumstances transfer superannuation to another person or otherwise deal with it until you reach retirement age. Some people settle on the basis that one keeps the larger superannuation and the other keeps the larger cash assets but if you are the party with larger superannuation you may want access to assets that you can use now, like equity in a house or cash to purchase a new place to live.
If you enter into a set of Consent Orders you can agree to split your superannuation now. This would mean that you can then choose to invest that superannuation as you see fit, you can use the superannuation fund to purchase something like life insurance or income protection insurance, and you can draw down on your superannuation if you meet the hardship requirements. If you enter into a Binding Financial Agreement then there will be a 'flag' on your spouses superannuation, so you will get it when they reach retirement age but you have no control over it in the mean time and you cannot do any of the previously mentioned things.
If you don't have either of these documents then, unless the person with the superannuation is willing to forgo cash assets to keep their super, you can't do anything about their superannuation. Even if you both sign a document saying that the other person agrees to pay you a certain amount when they reach retirement age this document is unlikely to be enforceable. Even if the document were enforceable you may find that your claim doesn't have priority over other claims (for instance the Estate, a later spouse who does get a proper binding agreement like Consent Orders, a bankruptcy trustee, or a bank if the person hasn't paid their mortgage or is selling their house).
We have seen some damaging oversights from people who have informally settled their financial matters at the end of a relationship, but haven't properly considered the Estate planning implications.
All divorces sever any gifts to a previous spouse in a Will, or the appointment of that spouse to any position (for instance Executor). In one matter a person prepared a Will after the divorce affirming the ex-spouse as the Executor because the entire Estate was to pass to joint children. This probably made sense at the time, but what they didn't do was sever the joint tenancy of the property that they owned together. As a result on the death of the father, the property passed to the mother not the children because as a matter of law joint tenancy occurs before the Will comes into effect. The mother wanted to transfer the property to the children but no one had the cash to pay the stamp duty, the stamp duty would not have been payable if the property had passed directly from father to children because the Estate would have had an exemption. This meant that the mother didn't qualify for the pension, the house now formed part of her Estate and could be challenged upon her death (that is one of the children could have waited for both parents to die before launching a challenge for Dad's property whereas no doubt Dad hope that Mum would keep all the kids inline), and if Mum had re-partnered then that partner could have challenged the Estate (so Dad's house would miss the children altogether).
If you want to understand the difference between joint tenancy and tenancy in common you should have a look at our article on that point.
This is just one example of the many issues that need to be considered in Estate planning, an informal arrangement may be difficult to prove down the track and when one witness to the informal arrangement is dead the other could claim that the transfer never happened, that the document was signed under duress, or that there was a later informal agreement that replaced the first one. A binding family law settlement is binding not only on both of you now, but also later on your Estate, bearing in mind that an ex-spouse is an eligible person to launch a claim against your Estate in ordinary circumstances (that is without a binding financial settlement).
If you want to know more about the difference between joint tenants and tenants in common then read this article.
An informal agreement is not binding on the Family Court, and more importantly when the Family Court makes a decision they will in almost all cases make it on the basis of current assets not the assets at the time of separation.
A person can make a claim for a property split up to a year after divorce, in the case of a de facto relationship up to two years after separation, or with leave of the court. That may not seem like a long time but it can be a long time.
In the case of married couples, you need to be separated for twelve months before you can apply for a divorce and sometimes the date of separation is not agreed. If you both wait until the later date, then prepare the documents jointly and send them to the court will give you a date some two to three months after filing. If the divorce order is made it will take effect one month and one day after the court date. One year after divorce is not really two years after separation but, in most cases, at least two and a half years after separation. If neither party takes action on the divorce it could be substantially longer.
In the case of de facto couples again, the date of separation can be disputed and this is because relationships rarely have a clear and obvious end point. Even the commencement of a new relationship is not necessarily proof of the end of the old relationship, as the Family Law Act acknowledges it is possible to have multiple de factos.
In any event even if it is two years, this is a long time for someone to take their share of the assets but then change their mind and commence proceedings. If the other person has squandered their share of the assets, and you have grown your assets, then they will be applying to the court for a share of your new better asset position. At the moment it is taking two years for an average matter to reach a final hearing, so if they waited two years, then commenced proceedings then by the time the final hearing came around your asset pool would have four years' worth of growth which is now available to your ex.
You need to enter into a binding agreement with your ex, preferably by Consent Orders, so that the abovementioned matters can all be dealt with. You should make an appointment to speak with Hamish Williams about your matter, your first appointment is free and they can set out for you what steps you need to take and what that will cost you.
You may have noticed that we have referred to consent orders or financial agreements, they are two different formal agreements that you can use to finalise your matter but they do have some key differences. Click on this link to read our article explaining the difference between the two.
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