Quarantining Family Assets from the Family Court

Updated 1 November 2024

by Peter Szabo

Virtually everyone at some stage in their lives will be in a relationship which is subject to the Family Law Act. Most de facto and same sex couples are, after 2 years, treated the same way as married couples. Two years is a very short time. It can be cumulative – 3 months here, 2 weeks there and so on. Young couples commence living together without any consideration of the legal consequences. Older couples seeking company can be deemed to be in a de facto relationship even if it was not their intention. On a separation and despite prior promises not to, a claim can be made.

Parents have long pondered over how they can effectively quarantine assets acquired before their children’s relationship commenced, and subsequent bequests to them. Before considering solutions, an understanding of how the Court deals with those assets would be useful.

Demystifying the Family Court

The overriding principle is that the parties are welded together financially. If one makes a contribution, the other has as well. Contributions can be direct or indirect - financial, as well as "homemaker and parent”. Those contributions are mostly considered as being equal.

The Court gives very significant credit for bequests and prior owned assets. However, in a long marriage, credit for those "outside" contributions can be eroded. Having considered the contributions of the parties, the Court can then make an adjustment based on "needs". This can mean that even if one party brings in all of the assets, the other may still get an adjustment in their favour - because they need it. In most cases it is the wife, because she has primary care of the children.

Family Trust Assets can be a Financial Resource

The most common situation involves parents holding their assets in a discretionary trust. Whilst these assets were built up without assistance from them, the children have been allowed to draw on those assets by way of loans or advances. The court cannot treat the trust assets in the same way as communal property acquired by the children by their own efforts. It can however, take into account the benefits of that resource to the financially stronger party. It may mean a higher percentage of their "matrimonial" property is awarded to the other party. It is rare for trust assets to be transferred as such.

Possible Solutions

All advances to family must be documented commercial loan agreements and the terms adhered to. Both spouses should sign the loan agreement. Otherwise the Court could treat the advance as being unlikely to be repaid, and therefore a gift to both spouses. Prior owned assets cannot be protected in this manner. They can be divested. However, there will be CGT, GST and Stamp Duty issues to consider. It is rarely a practical solution.

Establishing Capital trusts can ensure the bequest is kept as a resource rather than property. The capital can be left to the grandchildren in due course. The spouse must not in any way have contributed to those assets. The income stream is still a resource. Fundamentally parents must keep control of assets away from the children to ensure a resource does not become property. This can be difficult in the long term.

Even with these measures in place, the nature and extent of the resource can be scrutinised, and parents can be dragged into court proceedings. Prior owned assets cannot be quarantined, nor protected from "erosion". Promises not to make a claim are not binding. Contracts do not work either, unless they are a designated and properly prepared Binding Financial Agreement.

Binding Financial Agreements are the only solution

The above problems can be fully addressed in a BFA. With proper drafting there is no need to keep control away from children, nor go through the formalities of loan agreements. Prior owned assets can be valued and kept separate from an agreed joint pool of assets. Adult children can be actively involved in the family business without having to account to their spouse for any increase in its value by reason of their involvement. There is no litigation on separation, as the parties have predetermined what happens to the assets.

Properly done, they are binding. Both parties must have independent legal advice on its advantages and disadvantages. Full disclosure of all assets is essential for that independent advice to be given. The Agreement must also avoid hardship to children. Parents will not be drawn into a conflict. Family assets stay within the family. Blended Family considerations are covered, by avoiding any erosion of property brought into the relationship. The "needs" adjustment can be controlled by negotiation.

If one of the parties dies without a separation having occurred, its terms are still relevant for any Family Provision claims on the Estate. Such claims have been successfully defended by the use of a BFA. The Family Provision Court can take into account the terms of the BFA and uphold it if it is reasonable. This allows blended families to spell out their intentions on death, in the event there has not been a separation.

SUMMARY

  1. Spouses are welded together financially. Effort by one is effort by both.

  2. Trust assets built up by family and not by the spouses, once transferred, become their property. Contributions are highly relevant.

  3. Family assets not contributed to by the spouses are not property. They are still a financial resource to the relevant party.

  4. The ONLY way to quarantine assets effectively is with a sensibly drawn BFA.