on 07-11-2016 04:35 PM
We as Financial Advisers and the Divorce lawyers we work with are seeing a growing number of long-married couples call it quits. This is being termed “Grey divorce” or “Empty Nest Scenario”
As years go by, kids leave home, business demands grow and they get close to retirement age, where they will have to be near one another more, one of them usually realises they don't want to live the rest of their life in this manner or they want to seek out new experiences like international travel, a tree change or seachange or just want to concentrate on themselves or their business.
A long-married couple that has done well financially must figure out how to divide investments, superannuation and other retirement savings, investment properties and businesses started by one or other spouse during the marriage. They must contend with a crazy quilt of regulations, some federal, some state and some set out by superannuation legislation.
Pulling apart all the entangled arrangements woven into a web over 20 or 30 years is difficult and stressful. But dividing a nest egg in a way that allows both spouses to retire without worry is crucial when there is little work time left to make up any shortfall.
Many of my clients are in their 50s and are getting divorced after two or three decades. But the strategy for one client can be totally different for another who is different only in age. The plan or strategy for a woman in her 50’s who has not been in the work force for 20-30 years is totally different to the one for woman in her early forties with a recent employment history.
For women in their 50's negotiating a financial settlement as part of separation or divorce, those funds may have to last the rest of their lives. Even if they are employed, there is unfortunately still usually a large difference between the husband and wife’s ongoing remuneration packages which could mean a lifestyle change. Serious thought must be had before taking over debt on a family home for sentimental reasons.
What about where you have an SMSF?
Many people think because they have a family SMSF and all the money is usually pooled together for investments, that all the money is owned jointly between the husband and wife. Time to refer back to the annual statements and look at the members reports which will reflect the true ownership of the funds as it is broken down between the members.
An SMSF with just a husband and wife members who are getting divorced will almost certainly involve one of the members moving to another fund. This may involve moving the current market value of the exiting member’s account balance as well as an agreed amount of their former spouse’s account balance.
These are two separate amounts and must be treated as such. These payments require totally different reporting requirements and also probably give rise to different income tax outcomes for the SMSF fund.
It is important to ensure that these super fund tax issues are sorted out with complete accuracy so that one member does not unfairly pay proportionately more tax than the other member.
The latest Family Law provisions allow the parties to enter into an agreement at the time of marriage breakdown specifying how the superannuation interest is to be divided. However, no actual splitting occurs until a member’s benefit is paid.
The Superannuation Industry Supervision Regulations 1994 allows the benefit in most superannuation funds to be split at the time of the divorce. Therefore, two separate interests are in effect created – one for the member spouse, and one for the non-member spouse.
A division of a superannuation interest may be initiated in one of three ways.
- The parties may prepare a Superannuation Agreement, which they lodge with the trustee (together with proof of marriage breakdown or separation).
- If both parties cannot agree on how the interest should be split, they must refer the matter to the Court. The Court will have the jurisdiction and the power to make an order about a superannuation interest that will bind the third-party superannuation trustee, or
- Parties will be able to make a ‘flagging’ agreement. It prevents the trustee from paying out any benefit to the member spouse without first asking the parties how they wish to split the benefit. Parties would need to enter into a ‘flag lifting agreement’ at a future date to terminate the ‘flagging agreement’ and provide for the division of the superannuation split. This would be used where the parties are close to retirement and would rather wait and see the exact benefit before determining how to split it.
Where an interest in an SMSF is subject to a payment split under the Family Law Legislation Amendment (Superannuation) Act 2001:
- Specified benefit components will be split on a proportionate basis to the overall split.
- Any capital gains or losses that arise from the creation or foregoing of rights when spouses enter into binding superannuation agreements, or where an agreement comes to an end, may be disregarded.
When dividing up the assets in an SMSF we try to have an agreement to ensure that the spouse with lower income from employment receives the highest proportion of their member benefits as liquid assets or blue chip shares rather than property or illiquid investments. Often we can look at setting up Transition to Retirement Pensions to access tax effective cash flow from 55 onwards.
The Family Business:
Mid- to late-career divorce can cripple a business started during the marriage and owned by one spouse, because the other spouse is generally entitled to a share. Tax planning measures taken during good times to be able to distribute earnings across the family may now result in the business being torn apart as each spouse seeks to extract their equity in the business. Without careful planning, the business might have to be sold to comply with those terms or the business principal may have to take on excessive debt in their late 50’s to payout the former spouse.
We recommend that partners with a small business, especially those with children, enter into a “post-nuptial” binding financial agreement that spells out what happens to the business in the event of death or divorce. Such agreements, which need to be prepared by a solicitor well versed in Business and Family Law, are recognized in most states, are increasingly being used in estate planning, particularly for people in second marriages.
- Divorce later in your working life means you have to ensure you cover yourself for lifetime expenses
- Look for the maximum liquidity and flexibility in dividing assets especially from an SMSF where there is flexibility.
- Serious financial consideration should be made before fighting to hold on to the family home as it could become a burden you cannot afford.
- Small Business owners must plan in advance for the handling of divorce or death of a business partner.
- You need an Accountant, Financial Adviser and Lawyer used to dealing with Business as well as Family Law.
I hope this is useful information.