Protecting assets against family law claims

We often advise clients on how to protect assets, should they be sued for an amount of money they can’t pay. However, a much greater potential danger to your assets is losing them under the Family Law Act. What can you do about it?

The Family Law Act

When a marriage is coming to an end, the party with most of the assets, for example, a profitable business, often tries to make arrangements to prevent their spouse from taking those assets. The Family Law Act (the Act) contains s.106B which is designed to prevent exactly that. The section provides that the Court may set aside any transfer of property made to defeat an anticipated order under the Act. The old Family Court is now known by the catchy name of the Federal Circuit and Family Court of Australia. However, in this article, we will just call it “the Court”.

S.106B even allows the Court to set aside a transaction which may defeat an order under the Act, even if the transaction was not entered into for that purpose. All the Court needs to establish is that the transaction does, it in fact, defeat a potential order. The judges of the Court do not like attempts to circumvent potential property orders. They are usually keen to apply S.106B to set aside any attempt by a party to put assets beyond the reach of a spouse, and beyond the reach of the Court.

Using trusts, super or companies to protect assets

Holding assets in a trust, the superannuation fund or a company rather than in your own name can be an effective way of protecting assets from creditors. However, the Court does not let things like trusts, super funds and companies get in its way. If the family’s assets are substantially held in a trust, super fund or company, the Court will still consider them to be part of the matrimonial pool of assets to be divided under the Act. There are various ways the court can enforce its orders against companies, super funds and trusts, even though they are not parties to the marriage. These include an order appointing the Registrar of the Court is a trustee or appointor of a trust, to exercise powers to distribute the assets as ordered by the Court.

Accordingly, trusts, super funds and companies set up by the parties to a marriage give little help in protecting assets from orders under the Family Law Act.

Protecting inheritances

Over recent years, the Court has moved away from considering the parties’ entitlement to individual assets, and usually adopts the approach of putting all assets into a pool, no matter how they are held or where they come from. The Court then decides how to divide that pool. Obviously, if one party has contributed far more than the other, that will incline the Court to giving that party a greater percentage of the matrimonial pool.

Accordingly, if a party receives an inheritance, it will probably end up in the matrimonial pool where the other party may receive some share of it. However, if the will leaves everything to a trust set up under the will, rather than directly to a beneficiary, it will be much harder for the spouse of that beneficiary to make a claim on the inheritance. Trusts set up under a will are known as testamentary trusts and are also very beneficial for tax reasons and general asset protection, as well as giving some protection to assets against orders under the Family Law Act as they were set up by the will of the deceased, not by a party to the marriage.

Binding Financial Agreements

The only really effective way of protecting assets from claims by a spouse is for the parties to enter into a Binding Financial Agreement (BFA) under the Act. This is an agreement providing what should happen to the assets of the parties if they should separate. Provided each party makes proper disclosure of their assets to the other, and each party receives independent legal advice, the BFA will exclude the Court’s power to determine the split of the assets, and the assets will be divided in accordance with the terms of the BFA. A BFA can be set up before the marriage, during the marriage or even after the party separate.

Obviously, this is far preferable to the potential of a costly and emotionally draining dispute through the Courts. If you require advice on BFA’s, please contact our family law team.

De facto relationships

In times gone by, de facto partners had far less rights to property than if they were married. That has all changed, and there is no relevant difference between the rights of de factos and the rights of married parties.

Conclusion

A Binding Financial Agreement is the only effective way to ensure that assets will not be lost under orders of the Court, and any other attempts to structure assets to avoid orders under the Family Law Act will probably fail.

For more information contact us on (02) 9923 2321 or at enquiries@somervillelegal.com.au