Dangerous Misunderstandings: Do I need to have a Property Settlement?

So we’re going to be blunt here because this issue is really important. Lots of Australians think they’ve made a property settlement by scrawling some numbers on the back of an envelope, selling the house, closing the joint account, and then splitting the proceeds. This is just plain wrong and dangerously so.

Making a property settlement does not mean you have to have lawyers involved. It does not mean you have to go to court. It does not mean you have to split the value in any particular way.  But it does mean you have to go through a particular legal process – a property settlement under Australian family law.

Now there is no part of that law that says you must have property settlement. Former partners in this country are entirely free to make their own private arrangements if they wish.  For better or for worse, many people take this route. 

So you don’t have to have a property settlement. The question here is whether you need one. And the punchline of this Insight article, right upfront, is ‘yes’.  If you want to rule a legal line under your financial relationship, if you want certainty, and if you want to avoid huge financial exposure to the life circumstances of your former partner for many years after separation —  you will probably need to make a property settlement.

And now let’s understand why.

What is a property settlement?

A property settlement is actually made–not when all selling and splitting happens–but when a family court or an arbitrator makes orders that reallocate the legal rights and obligations in relation to the assets and liabilities of a former couple.  These orders can be made after two types of processes: 

• If the former couple is agreeable, they can put their agreement about the proposed division of the property to the court in an application for orders ‘by consent’. (These get called ‘consent orders’.)  Unless the court thinks the proposed plan is plainly unfair or wrong, the court will give its authority to the agreement and make the orders the couple has jointly applied for.  
• If the couple can’t agree, then one or other of them can apply to the court or to an arbitrator to make a decision about the fairest way to distribute the assets and liabilities, and then to make orders. 

Either way, once property settlement orders are made, they are legally enforceable.  And the financial situation between the parties is settled, once and for all (except in the most unusual circumstances). 

What is a binding financial agreement?

A binding financial agreement may be an alternative to a property settlement in some circumstances – perhaps in the case of second or subsequent long-term relationships. Like a property settlement, a binding financial agreement does draw a financial line under the relationship—if the agreement stands up over time.

A binding financial agreement is a special form of property agreement that is made between the parties only, with no court oversight.  It cannot be undone unless there are technical flaws in the way it was put together in the first place.

The apparent ‘advantage’ of a binding financial agreement is that you can agree absolutely anything in it—say, that you will both throw all of your cash into the sea. There is no court looking over the deal (to say, hey, that cash-in-the-sea thing…it’s not happening). 

One disadvantage, is that it is relatively easy to fail to make technically watertight binding financial agreement.  

And you will definitely need to have two lawyers involved, and perhaps also an accountant.  Or two accountants.  The fees for making a binding financial agreement can be twice the cost of a set of consent orders.

But from our point of view, the biggest problem with binding financial agreements is the flipside of the supposed ‘advantage’.  There is no court looking over the deal even though it might be desperately unfair to one of former partners. The contents of the deal in a binding financial agreement are not controlled by the family law’s method for deciding what is fair.  Especially if you are the partner in the weaker financial position, you need to be very clear about why you’re being asked to leave behind this standard of fairness. 

Why should I have a formal property settlement?

So let’s be crystal clear: a private informal agreement made between two people after their separation is not a property settlement.   

And yet, you might say, if we’re happy enough with the deal, what’s the problem?

Well, our main argument is not about the quality of the deal now, although there are certain concessions, like in relation to tax and stamp duty for example, that might make a formal property settlement a better deal, even for now.  

But our main point is about the effect of the future on your deal.  Because, in reality, with an informal agreement for a property split, the deal is simply not done.   Depending on what might happen to you, to your partner,  or to your children, your informal arrangement might be opened up again, and re-arranged by the courts after the next several years, possibly even after the best part of a decade or more.  If you are not a certified fortune-teller, how can you be ‘happy enough’ about this?

These are the issues:

• Enforceability. A property settlement between the parties, formalised under family law, is legally enforceable in court. This means that the deal you make now will be the deal you get. Or you can sue. There is no scope for changes of heart, conflict, or the influence of a new partner to change the outcome. By contrast, an informal arrangement can’t be enforced at all. If your partner changes their mind, the overall deal may be off, even if property has already changed hands. 
• The timeframe problem.  If you make an informal agreement, the other party still has the option, for at least two years after the date of separation (for de factos), or for one year after the date of the divorce (for married partners) to apply, by themselves, to the court for a formal property settlement.

Lots of married people don’t get divorced in the minimum time, so the period of this exposure to the possibility of future court action can stretch on for many years after separation. 

Then, even if the legal cut-off times are reached and surpassed, if the former partner is able to prove a significant change in circumstances, or hardship to themselves or a child, the court may allow their ‘out-of-time’ application for a formal property orders even further out into the future. 

• Changes in net worth. If one former partner decides, down the track, to apply to the court for a property settlement, the family property settlement law will be applied to the parties’ property as it is valued at the date of the hearing. Because of the current delays in the court system, this is likely to be more than three years after the date of the application. 

Let’s say a couple divorces two years after separation (which is not unusual), and the application for disputed property orders is not made for another year. If the court delays improve slightly from present standard, the final trial might come around, say three years after this.  In deciding the property settlement orders at that time, the court will consider and include all of the change in value and equity in the parties’ property over that six years after separation. 

And that’s not all.  The pool of assets available for division between the parties by the court will include all of the property possessed by both parties at the date of the trial, even if it was acquired after separation. In the example above, you’ll agree that it is more than likely that there have been extra assets acquired by at least one party in those six years since separation.  All of this will be up for distribution between the old partners. You could win here. Or you could really lose. 

Now think about your own circumstances.  Think about the implications of a future claim by your former partner in the light of possible changes in the value of your (and their!) business assets, superannuation, investments, real estate, the possibilities of an inheritance and other significant possible changes.

It’s worth noting too, that the debts incurred in this open timeframe would also go into the property pool for consideration by the court. These might mean you end up ‘sharing’ the gambling or credit card debts accrued by your former partner over the entire period from separation to the date of the hearing.

And remember — if a former partner is able to show hardship or changed circumstances, or if a divorce doesn’t happen for several years, the timeframe of the financial exposure presented by an informal property arrangement can stretch forward almost endlessly into the future.

• Changes in the parties’ financial circumstances. Income, financial needs and financial resources are all factors used in the court’s assessment of a property settlement. If you settle, formally, by agreement, soon after divorce or separation, your settlement will be based on your financial circumstances at that time, rather than later into the extended timeframe of financial exposure.  

Who knows what might happen to you both? What if one former partner loses their business, becomes disabled, or contracts a chronic illness in that timeframe? What if one of them starts to (or stops) earning a big salary?

• Stamp duty. The law of stamp duty varies from state to state and is subject to changes. In all States and Territories, transfers of property made pursuant to a family law order, including a consent order, will be exempt from stamp duty. An informal agreement may or may not attract this exemption. 
• Tax.   There are important capital gain tax concessions available for property transferred under a formal property settlement. 

Do we still need a property settlement if we don’t have much property?

Yes. 

All of the issues around the possibilities of changes in the future apply even if you don’t have a lot of assets right now. 

Also, it can be particularly important for families with less that the available assets are divided fairly, and that there is certainty, enforceability and fairness around the deal. 

Should I try to agree a property settlement or start a property case in court? 

It really makes sense to come to agreement if you can. Some lawyers suggest you should cover your bets and make a court application for orders while you’re trying to negotiate the settlement. This is so that you’re covered for the possibility that the deal might fall apart before it’s formalised in consent orders, and you end up exceeding the legal time limits for applying to court. (Remember, you have one year after divorce or two years after separation of de factos to apply to the court for a property settlement.)

Rather than covering bets, though, we suggest just keeping an eye on the time!  If you are nearing the time limits, and a deal isn’t done, you can simply apply to the court then.  

Our view is that starting property litigation when it’s not clear you need to, is just plain destructive. Good for lawyers perhaps, but destructive for the relationship, for the family and for the deal itself. And quite apart from the unpleasantness of family court litigation, the legal costs of a fully litigated property case could well be around $100,000 for each party. These amounts are usually funded directly out of the settlement. This is a lot of cornflakes that neither of you, nor the children, will be eating.

The unfulfilled spectre of the possibility of litigation, and the prospect of these fees, often acts on parties as powerful motivation for their efforts to negotiate, agree and then to formalise a property settlement as consent orders. And this is quite apart from the natural wish to move as quickly as possible towards a new future and a clean financial slate.  

Having said all of this, sometimes it is clear from the start that a property settlement is going to be very difficult to agree, with or without outside assistance. If this is the case for you, seek legal advice immediately.

The bottom line.

There is no doubt that making a formal property settlement is more trouble than not.   But if you decide to make the effort, you will be making an investment in a more certain future, for yourself and for your family. This is the case whether you are amicable or not. And whether you trust your former partner or not.  If that line is not ruled under your financial relationship, the world might simply turn, and you could both end up where neither of you expected to be. Still entangled.  

How can Tribe help?

Whether you intend to involve a lawyer in arranging your property settlement or not, it is very important to at least explore the issues with a lawyer before you make a decision about how to proceed. And you should really do this as soon as you can after separation. 

Tribe can help you get clarity around the legal issues and decide your approach, providing this preliminary legal advice, coaching in negotiation and in assisting you with various types of documentation to arrange your property settlement, or to apply to the court.  

Disclaimer

Every single person’s family law situation is unique, and the legal issues associated with that situation can be very serious. The legal information contained in this Insight is for general guidance only.  There is no one-size-fits-all legal solution.  Professional advice in the individual case should always be sought.