Divorce and 'jointly' owned assets

Image credit: Stefano Corso

In a recent post, the impact of separation following a relationship breakdown on estate planning arrangements was considered. 

One particular aspect that arose recently in this regard involved an adviser who identified that many assets owned by a couple who had recently separated were owned as joint tenants. 

While the adviser was quick to ensure updated will and power of attorney documentation was put in place, at the same time, for the benefit of both spouses, steps were also taken to sever the joint tenancy ownership and convert it to tenants in common. 

An earlier post summarises the distinction in this regard, and it is critical that joint ownership structures be considered as part of an estate planning review following a relationship breakdown. 

The other aspect in this regard is the often forgotten requirement that before a married couple can in fact divorce, there must be evidence of an irretrievable breakdown in the relationship that has lasted more than 12 months. 

As touched on in last week's post, while divorce will often partially revoke a will to the extent that it benefits a former spouse, given the 12-month 'waiting period', the conservative approach is to always update estate planning documentation as soon as it is clear that there is no real prospect of a reconciliation following the initial separation. 

Until next week.

Divorce and Estate Planning

Image credit: Public Domain Pictures

The impact of a relationship breakdown on any estate plan must be considered carefully.

While in many jurisdictions, a formal divorce leads to a partial revocation of an existing will, if the couple has only separated, or alternatively, if they have only had a property settlement, neither of these events impact on pre-existing wills.

Generally speaking, before a divorce takes place, there must be complete separation for 12 months following a breakdown of the relationship.  On that basis, the conservative recommendation would be to always update wills and related documentation as soon as permanent separation takes place.

In most instances, particularly where the estate planning documents have been implemented in recent years, this process need not be time consuming nor expensive.

In an upcoming post, we will look at a client situation that arose for an adviser recently in this area.

Until next week.

What roles do ‘quasi-ownership’ arrangements play in succession planning

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What roles do ‘quasi-ownership’ arrangements play in succession planning ?’ at the following link - http://youtu.be/oUcuYyRXZ_U



As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

This is probably a really developing area in terms of what we've seen in recent times, because out of the GFC, the changes to trust law that many of us have experienced first hand in terms of the impact of relationship breakdowns and/or the intergenerational transfer that goes wrong; you find in many family scenarios they are effectively wanting to, if not fully rule from the grave, at least do a very good impersonation of it.

In that scenario, as much as we've spoken earlier today about secured loan arrangements and actually transferring assets down and securing those under a loan arrangement; a more ‘bespoke’ version of that is never having the asset leave the master trust in the first place and using tools such as letters of wishes or the way in which the trustee company constitution is crafted to allow the underlying beneficiaries to have indirect access to the assets, whether they be business assets or investment assets.

Beneficiaries will probably still have to meet KPIs in relation to their performance and running of those assets, but they never actually get the physical ownership or the legal control of them.

It may be overtime that beneficiaries do ultimately receive legal ownership or legal control, but for an interim period, which may last for many years, what this final form of structure does is effectively keep the assets within the initial master trust structure and really only have a synthetic or notional allocation of assets made, at a trustee level, for the underlying beneficiaries.

Until next week.

Family court case on the distinction between a loan and a gift

We are increasingly seeing advisers and clients alike, focussing (very deliberately) on the way in which they advance monies to their children to assist with, for example, the purchase of a family home.

Today’s post looks at a recent case, which was decided last year, and provides a useful example of the distinction between gifting and lending monies from a family law perspective, particularly in the event of a relationship breakdown.

The case of Pelly & Nolan [2011] involved a situation where the husband’s father advanced approximately $520,000 to ‘help his son out’. The initial advance was $320,000 to assist the son and his young family purchase a property. Additional advances were also made to assist with general living expenses totalling approximately $200,000.

The evidence in the case suggested that the father sought repayment for only the $320,000 advanced relating to the property acquisition and not the monies advanced for general living expenses.

As the initial advance was facilitated by a loan agreement and for the purpose of assisting with the property purchase, the court held that such advance was enforceable, even though no interest on the loan had been demanded nor paid.

In relation to the additional $200,000 advanced, there was no evidence to suggest that a repayment would be enforced by the father.

In the circumstances therefore, the court held that the $320,000 advance was indeed a loan and thus a liability that needed to be deducted from the matrimonial assets; whereas the $200,000 advance would be included as property for distribution to the wife (although the fact that it had been contributed by the husband’s father would be taken into account).

A link to the full decision is as follows –

http://www.fmc.gov.au/judge/docs/Pelly%20&%20Nolan%20[2011]%20FMCAfam530.rtf

Until next week.

Contribution assessments in family law cases

The posts for the last 2 weeks have focused on the decision from the end of 2011 of Harris.

One final aspect of the case that it is worth highlighting involved the comments made by the Court about the ‘contribution’ that the parties to the marriage, and their respective families, made to growing the asset base during the course of the relationship.

As many will be aware, once the court has determined the property that satisfies the definition of being an ‘asset’ of the marriage and then in turn the property that is a ‘resource’, there is a need to determine the contribution the parties have made to creating the wealth.

In the Harris case, the appeal court expressly directed that in the retrial (which is yet to take place) the judge must be careful to ensure that adequate weight is given to the husband and his parents in terms of building up the value of the business that was owned by the family trust at the centre of the dispute.

This direction was as a result of the initial trial judge’s decision to simply ignore the contribution that had been made by the husband and his parents over many years, both before the marriage and during the course of it.

Until next week.

Trust distributions 101

Last week’s post touched on the Family Court decision from the end of 2011 concerning the way in which a family trust was treated as part of a matrimonial settlement.

One other aspect of the case that is worth mentioning involved the conclusion by the Court about the, purported, use of a corporate beneficiary.

In particular a ‘bucket company’ was set up some years after the initial establishment of the trust. The evidence that seemed to be accepted by the Court was that the company was established for ‘tax minimisation or reduction purposes’.

Unfortunately, to the extent that a disgruntled third party (including the Tax Office) may wish to challenge the distributions, the company was not in fact a beneficiary of the trust.

While the ‘wrongful’ distributions (in the words of the Court) were not explored further in the context of this family law case, the comments highlight the theme of many earlier posts – that is in almost every area where structures are used (whether they be trusts, companies or super funds) it is critical that someone takes responsibility for reading the establishment documents before any step is taken.

Until next week.

Interdependency relationships – further examples

Following on from last week’s post, some comments were received in relation to the lack of cases in this relatively new area of law.

Interestingly, the superannuation legislation (for those particularly interested, the actual regulation is 1.04AAAA) sets out a number of tests in relation to whether a relationship between two people amounts to an interdependency relationship.

In summary, the tests include:

(a) the duration of the relationship;

(b) whether or not a sexual relationship exists;

(c) the ownership, use and acquisition of property;

(d) the degree of mutual commitment to a shared life;

(e) the care and support of children;

(f) the reputation and public aspects of the relationship;

(g) the degree of emotional support;

(h) the extent to which the relationship is one of mere convenience; and

(i) any evidence suggesting that the parties intend the relationship to be permanent.

A link the above definition is as follows:
http://www.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s1.04aaaa.html

Many of these themes are similar to the definition of what a de facto relationship is, which were summarised in a post a few weeks ago.

Due to the September holidays, the next post will be in a couple of weeks time.

What is an ‘interdependency relationship’?

Following on from last week’s post, one issue that was raised with me related to the concept of an 'interdependency relationship' under the superannuation rules.

Again, for those who have not had cause to look at it recently, this definition is worth reviewing closely and an extract of it is included below.

Two persons (whether or not related by family) have an interdependency relationship under this section if:

(a) they have a close personal relationship; and
(b) they live together; and
(c) one or each of them provides the other with financial support; and
(d) one or each of them provides the other with domestic support and personal care.

In addition, two persons (whether or not related by family) also have an interdependency relationship under this section if:

1. they have a close personal relationship; and
2. they do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (a), (b), (c) and (d); and
3. the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

A link the above definition is as follows:

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s302.200.html

Until next week.

De facto relationships - further examples

Further to last week’s post, the list below sets out some of the specific circumstances that are taken into account by the courts to determine whether a relationship does amount to a de facto relationship.

Circumstances of the relationship taken into consideration include any or all of the following:

(a) the duration of the relationship;
(b) the nature and extent of their common residence;
(c) whether a sexual relationship exists;
(d) the degree of financial dependence or interdependence, and any arrangements for financial support, between them;
(e) the ownership, use and acquisition of their property;
(f) the degree of mutual commitment to a shared life;
(g) whether the relationship is or was registered under a prescribed law of a State or Territory as a prescribed kind of relationship;
(h) the care and support of children; and
(i) the reputation and public aspects of the relationship.

A link to the above definition is as follows:
http://www.austlii.edu.au/au/legis/cth/consol_act/fla1975114/s4aa.html

Until next week.

What is a de facto?

Following on from last week’s post, I thought it would be useful to also summarise the definition of 'de facto'.

This particular definition is taken from the Family Law Act (Section 4AA).

In summary, a person will be in a de facto relationship with another person, if:

(a) the persons are not legally married to each other; and

(b) the persons are not related by family (see subsection (6)); and

(c) having regard to all the circumstances of their relationship, they have a
relationship as a couple living together on a genuine domestic basis.

A link to the above definition is - http://www.austlii.edu.au/au/legis/cth/consol_act/fla1975114/s4aa.html

Until next week.

What is a spouse?

The issue that what kind of relationship satisfies the definition of a 'spouse' has been coming up increasingly regularly.

The Tax Act sets out one of the most used definitions in this regard and I thought it useful this week to extract that definition in its entirety, given that it has been amended relatively recently.

A "spouse" of an individual includes:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a State law or Territory law prescribed for the purposes of section 22B of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

Until next week.

Prenups and the need for independent legal advice

An interesting issue came up recently in relation to a 'prenuptial agreement (more technically referred to as a 'binding financial agreement')'.

In particular, as many would know, the need for both parties to the relationship to obtain independent legal advice was brought into question because often one party will choose not to follow the advice that is provided. That is the lawyer may recommend that the agreement not be signed, however the client will still sign.

Based on recent cases, it seems clear that:

1. There is no need for independent advice to be actually accepted or followed to satisfy the requirement that independent advice is sought.

2. Even if advice provided by the independent lawyer is later shown to be incorrect, the criteria that independent advice be sought may still be satisfied.
Until next week.

De facto death duty confirmation

As many will have seen, the lead article in Friday’s Financial Review confirmed that, as far as the Tax Office is concerned, payments made by a super fund, following the death of a member, will be subject to (at least) a 10% capital gains tax bill.

Tax is payable in these circumstances on the difference between the market value of the underlying assets of the fund and the cost base.

While some advisers have tried to adopt approaches to get around what is effectively a death duty, the conservative view as to the likely ATO approach has now been confirmed beyond doubt.

Depending on the exact circumstances of a client, there are still mechanisms to significantly reduce and/or eliminate the capital gains tax liability that might otherwise be triggered on the death of a fund member, however the announcement by the Tax Office further underlines the importance of ensuring a comprehensive, integrated and up-to-date estate plan.

For those interested in reading the full draft ruling, a link is set out below.

Until next week.

http://law.ato.gov.au/atolaw/view.htm?DocID=DTR/TR2011D3/NAT/ATO/00001&PiT=99991231235958