How does the Family Court divide assets? What factors and individual contributions to wealth are taken into consideration? And what would you need to know if you were heading into a family court situation where a pool of assets was going to be divided up?
In this episode, Perth Lawyers Kyran Borges Nunes and Aimee Price discuss this question from an experienced legal point of view. Joining them is Paul Holly of Evolve Wealth Management, who brings his financial planning experience into the picture to provide advice on how the court’s decisions can affect your life, and how to prepare your life for those decisions.
The full transcript is below!
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Aimee: Welcome to WN Legal‘s next podcast. My name is Aimee, and I am one of the solicitors at the firm. Together with me, I’ve got Kyran, the Director of WN Legal, and also Paul Holly from Evolve Wealth Management. Now, Paul is joining us today to discuss a more financial planning aspect towards financial and property settlements in family law matters. So, welcome, Paul and thank you for coming.
Paul H: Thanks very much, Aimee, and glad to be here.
Aimee: Beautiful. Today’s podcast will … Kyran will be taking the reins today, and he’ll be discussing the way in which the family court and, I suppose, practitioners in general, deal with how property assets are to be distributed, who’s entitled to what, and what steps we should implement to try and get the best possible results for the clients.
Now, before we start, I just need to read out a general disclaimer. So this podcast is a general discussion about the areas of law that we practise in, that the public may be interested in. This podcast should not be taken as a substitute for legal advice or financial planning advice, whatsoever, as each case is different. Until such time as we’ve properly evaluated your personal circumstances, we are unable to determine an appropriate tailored plan to your specific needs.
I will now hand over to Kyran, who will give us a bit of an intro, as to the topic today.
Kyran: Yeah, thank you, Aimee.
Well, in discussing our podcast today, I’ll get straight to the point. The family court looks at a four-stage process when determining property entitlements and what each party’s entitled to. The first step is always to determine what the net asset value is of the property pool. In determining what type of property is included in the evaluation, we’d probably be looking at all your assets and determining, firstly, whether you are in a marriage, or whether you are in a defacto type relationship. In Western Australia, specifically, just for example, superannuation is not determined to be a property asset that can be split between the parties. In fact, it is only determined to be a financial resource, which would have a bearing in the overall property split, but cannot be split per se.
All right, now, once we’ve established what the asset pool is of the relationship … so we would arrive at a figure. We will use a hypothetical figure for the purpose of this podcast. So let’s say we’ve got a net asset pool of $300,000, for the purposes of our demonstration. The next step we would normally go through with our clients, at the initial consultation, would be to then move onto what we call financial contributions. That is always the second step that the family court takes into account. What we do is we evaluate, dependent on the income between, perhaps, the husband and wife, or the partners of the relationship, we would determine who was the higher income earner. We would determine who, perhaps, has received a gift or inheritance towards the relationship. We will also determine initial contributions, and then sort of associate percentages with that aspect or step.
The next step is to look at the non-financial contributions that both parties have taken into account, or contributed to the relationship. That always involves who’s been the primary carer of the children, who’s basically done the gardening, cleaning around the house, cooking. All those aspects, the court takes into account to determine what’s a just and equitable split between the parties.
Then what we look at is a next step, which we call future needs. The family court, once they’ve determined the contribution aspect and the net asset pool and what’s available to be distributed, they will then make an adjustment for what we call future needs. Now, that involves taking into account earning capacity between the parties. It would take into account your medical needs, your age disparity, all those type of factors. Will you be able to undertake full-time work, part-time work? Do you have some form of disability? These are all aspects that we would sit down with you and tailor your circumstances, to determine what the entitlement would be.
Ultimately, what we would do is sit back, because there’s also another step that most people don’t talk about, is determining, as a whole, after we’ve done that evaluation, what is just and equitable. Sometimes parties could be syphoning money out for gambling or on other aspects of the relationship that we wouldn’t consider to have benefited the relationship. In doing that, then we would be able to give you a rough estimate of what we expect the family court would do. Obviously … That we be obviously tailored towards … every circumstance is different. Each case can have a different outcome, and that’s the way we deal with things.
Now, after we have been able to determine your entitlements and give you a range of what we expect you are entitled to, the next step is to go to a financial planner, and we’ve got … Luckily, we have Paul Holly from Evolve Wealth Management, which is just in the opposite corridor to us, and I highly recommend Paul. We’ve dealt with him for quite a while now, and I find that he’s quite a knowledge person, and I would definitely go to him, personally, myself. Paul would then be able to work with the entitlements that we have given to you and tailor a specific plan to determine, will it be better for you to keep your super or, perhaps, is it better to sell an investment property? That’s going to be tailored towards your specific circumstances.
What I’ll do now is I’ll put on Paul, onto the podcast, and get his ideas and plans of how he deals with his clients, to determine those steps.
Paul H: Thank you, Kyran. When we’re looking at any sort of financial planning for clients, we’re always assessing, firstly, what are their goals? What sort of plan do we need to put in place? And within that plan, what sort of strategies and investments and products do we need to use, to reach those goals? Generally, with a couple, they have combined goals. Then if it gets to the stage where we’re looking at separation, we need to look at the individual goals of each of those individuals.
Prior to doing that though, we need to look at the consequences of unwinding that combined plan. More than likely, there’d be assets in place. They already may have their principle residence, investment property, they might have a share portfolio, and they might have super funds. That super fund can be individual super funds, or they could have a self managed super fund, where they’re both members of that self managed super fund.
The first thing we need to look at is, what are the consequences? You know, will assets need to be sold down? Will debt need to be paid off? Is it a good time to be selling assets, at the moment? If so, will there be capital gains tax consequences? Or will they have to take a loss? Will some of the debt need to be paid out partially, or all of it? That’s the types of things we look at.
So then, if we’re looking at an individual, in any sort of financial plan, cashflow is critical. Going from a couple to an individual, then we look at their individual cashflow to see what sort of income they’re going to have coming in, in their new arrangement as an individual, what sort of living expenses they’re going to have, and will that be enough, or will they be drawing down off the capital that they have? If there is going to be surplus income, can we be investing that to build an asset for their future?
Also, what often happens is, one of the members of the couple likes to keep their principle residence. If so, what are the consequences of that? Will they have to take on the debt, if there’s a mortgage attached to that? And can they service that debt going forward? Firstly, can they get a loan for that debt? And secondly, can they service that debt going forward? Additionally, what is their plan to pay down that debt over time? More than likely, if there’s debt in place for the couple, it will need to be restructured.
Now, also, we need to look at, is one member of the couple prepared to take more super assets than the other, therefore giving up their access to those assets until they are able to access those assets in superannuation? If so, are they going to get more assets allocated to them? What’s the opportunity cost of that?
One of the other things, some of the legal things to consider in financial planning is, binding death benefit nominations on super funds. That’s something which is quite often overlooked in a separation, and is critical. And also, obviously, changing wills going forward.
Another things is, if they have insurance in place, generally that insurance is based upon their goals and combined assets. More than likely the insurance will need to be revisited, and may need to be restructured. It may need to be increased or decreased, but it needs to be revisited.
One of the main things is just getting advice early. It’s very important to get the advice before you go and sell a property or make any decisions in regards to the assets, because in that way, you’re making informed decisions, rather than potentially going and selling an asset without knowing the consequences. For example, what I’ve seen in the past is, if a principle residence gets sold and there might be debt on the investment property, the bank, unless they’re advised beforehand, will go and pay off that investment debt, which means that there’s consequences as far as tax deductibility goes, going forward. Those are the sort of things that need to be advised prior to any transactions being put in place.
The other really important thing is working together. So, having a team. A lawyer such as Kyran giving you the legal advice, us, there’s the financial planners, but also we work with accountants, and also mortgage brokers. So we’ve got all those areas covered, so the advice is coordinated. When we’re providing that advice, you’re getting the best advice from all the different angles, and everybody’s in the loop as to what’s happening.
They’re probably some of the main things that need to be looked at, but everybody’s circumstances is different. And, as I mentioned, getting that advice early on in the piece is critical.
Aimee: Yeah, I think that’s really true, Paul, and I think that, in itself, was extremely informative. I know Kyran and I have some matters where we’re dealing with quite a large asset pool, and I think, generally … and this obviously isn’t the circumstances in every case … but generally, one party is more financially savvy than the other and knows, maybe, more about how they want to deal with the assets and has maybe built a lot of that base asset pool themselves. So the party that’s possibly … and I don’t mean to be generalising, here … but possibly the mother who’s been at home, caring for children, or something to that effect, may not have as much financial savviness as the other party.
So that’s where it’s really imperative that before we actually go working out who’s getting what, that you’ve actually got this financial planning advice first. That’s not … not saying that that’s only for large asset pools. For small asset pools, as well, it’s really important that that happens first. I think that was extremely informative. I’m not sure if Kyran has anything else to add, in respect to Paul’s comments.
Kyran: Look, I mean, without having an appropriate financial planner to assist us in our legal family law property matters, especially the big asset pools, you’re just simply not getting the full picture. What we tend to find is people often have an idea of how they want to split their assets, but without having the appropriate financial advice, which may have potential implications such as CGT, capital gains tax, like Paul’s mentioned, which they’re not factoring in, simply.
And us, as lawyers, we don’t have the capability … or as family lawyers, don’t have the capability to give you that advice. We’re going off what we expect the court to do and giving you an idea of range of entitlements, but we’re not able to specifically tell you whether that’s the best financial decision. So thank you very much for your time, Paul. It’s most appreciated and very beneficial to us. And we would like to conclude the podcast on that, so, thank you.
Aimee: Thank you, Paul.
Paul H: Thank you, Kyran.
Aimee: Thanks, Paul.