Protecting Assets: Benefits of a loan agreement when a marriage breaks down
The work done by accountants to assist people to organise their affairs, make them tax effective and protect them is invaluable. In a myriad of ways, accountants are able to preserve the hard earned wealth of parties and, ideally, increase it.
A significant part of the strategy that accountants adopt when assisting parties with their financial affairs is to build in safeguards – whether that safety is in relation to market forces, taxation or creditors.
One particular type of safeguard occurs where accountants assist parties to put structure in place that are designed to provide protection if those parties, or children of those parties, go through a marriage breakdown. This protection takes the form of a Loan Agreement if parties provide funds to their children and want to make sure that those funds are repaid if their child’s relationship dissolves or otherwise that those funds are credited to their child rather than their spouse. Another type of safeguard relates to establishing discretionary trusts that are designed to protect assets and leave them out of an asset pool in the event of a relationship ending. Finally, accountants may urge their clients to obtain legal advice with respect to entering into a Binding Financial Agreement either prior to marrying, or during, so that the way in which the assets are to be divided upon the breakdown of a marriage or relationship are pre-determined.
The difficulties with these strategies are twofold. Firstly, if done incorrectly, they are unlikely to provide parties with the reassurance and protection that they desire. Secondly, given the far reaching powers of the Family Law Act, it’s difficult to place assets at arm’s length so that they will not form part of the asset pool upon a relationship breakdown.
Dealing firstly with the issue of loans, parents often wish to provide their children with some financial assistance to, for example, buy their first home, and given the price of houses currently, for many children, that is the only way that they are able to enter into the property market. It’s rare however, that parents providing money will do so with the possible breakdown of their child’s relationship in mind. Furthermore, they often do so without documenting the transaction; providing uncertainty as to whether it’s a loan or gift.
In short, the things to remember regarding parents providing money to children are:
- If it is a gift, you should ensure that it is properly categorised (in writing) as such, with an acceptance that, upon the breakdown of a relationship, those funds will be credited to the child of the person that advances the funds, but will form part of the asset pool.
- If it is a loan, then it is insufficient for the parties to simply share a verbal agreement, as there will be uncertainty as to whether it is a loan, and it will be very difficult to prove. In my experience, this often results in the Court concluding that it is a gift rather than a loan.
- Any Loan Agreement that is reached should be preferably signed by the child and the child’s spouse.
- The Loan Agreement should set out the terms of the loan – when it is to be repaid, the interest to be charged and so forth.
If a loan is evidenced in writing and acknowledged by all parties, then, upon the breakdown of a relationship, ensuring that those funds can be repaid (usually on the sale of the property) will be far simpler.
In relation to the establishment of a discretionary trust, the matter of Kennon & Spry provides, in short, that control of the trust is the crucial factor. Irrespective of a wide class of beneficiaries existing and properties being owned by the trust, if a spouse going through a relationship breakdown, has control over the trust (as the Appointor, for example) or there is a long standing history of receiving distributions from the trust, then that trust, and the property owned by it, is likely to be included in the asset pool.
In regards to protection for children, then parties having their children as a wide class of beneficiaries affords some protection. However, the Family Court would look at the distributions received by the children to establish whether an expectation as to regular distributions can be established and may conclude that an interest that the child has in the trust amounts to property, or, at the very least, is a financial resource to be taken into account.
When it comes to pre-determining the way in which assets are to be divided upon a relationship breakdown, the Family Law Act provides for parties to enter into a Binding Financial Agreement. That can be entered into before the marriage or relationship, or during. As alluded to above, if done properly, they are binding. However, the requirements for them to be binding are very strict and the Court is loathe to allow agreements to stand if those requirements are not followed. Furthermore, in the case of entering into an Agreement prior to a relationship commencing, if it is, for example, close to the wedding date, then it’s likely that a Court would conclude that it amounts to duress (often weddings are called off if Agreements of this type are not signed). If there is insufficient financial disclosure from both parties, then the Agreement is likely to be set aside.
Finally, if the advice given to the parties is inadequate, then the Agreement is also unlikely to stand up to scrutiny if a person applies to the Family Court or Federal Circuit Court for it to be set aside.
In summary, there are ways in which parties can protect, to the extent possible under the law, their assets, and the assets of their children, if a relationship ends. However, it’s imperative that the steps taken are done through consultation between the accountant and the parties’ solicitor, and that advice from, preferably, an Accredited Specialist in family law be obtained to ensure that the various requirements of the legislation are met, particularly in the case of Binding Financial Agreements.
For more information about how to protect assets in the event of a relationship breakdown, please contact our Family Law team in Parramatta and Norwest:
Malcolm Gittoes-Caesar, Principal
Phone: +61 2 9895 9220
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