How to protect your finances from a relationship breakdown

It is becoming increasingly important for people to think about protecting themselves financially in case of a relationship breakdown. It may not be romantic, but it’s crucial.

According to the Australian Bureau of Statistics 56,244 couples divorced in 2021, a 13.6 per cent increase from the year before, perhaps due to pandemic-related stresses. This makes planning and pragmatic thinking essential.

Very few people enter a relationship with no assets, yet most don’t consider protecting the wealth they’ve accumulated beforehand. And when things are rosy, you’re unlikely to think about it.

However, you need to ask objectively: “If this relationship doesn’t work out, what do I want to walk away with?” Have a financial arrangement in place: prenups are no longer just for Hollywood stars or the mega-wealthy.

And if you’ve already tied the knot, it’s not too late. We are seeing an increasing number of clients requesting “post-nups” to secure financial arrangements after their relationship has started – in some cases, after many years of being together.

Be across finances and have hard conversations up front: At the outset of a relationship, it’s key (and unromantically pragmatic) to have a conversation around finances: what can we agree should happen financially if our relationship doesn’t work out?

Women in particular are vulnerable when relationships break down. I’ve seen many women who have left the financial management of the household to their husbands because they are focusing on other important family and household roles. When the marriage breaks down, they don’t understand how things work: for some, this is even down to the level of how bills get paid.

I’d recommend paying attention to household finances and having an active involvement from the start. At the very least, understand where your joint assets are and know what you are signing and what your joint financial commitments are. I also recommend both partners are involved in any discussions with trusted advisers (such as tax, legal and financial advisers).

For parents gifting money directly to a child and the child’s spouse to help them buy a home or a business, it’s worth putting a loan arrangement in place, so that if the relationship fails the funds can be called back.

Similarly, if you have received an inheritance or a substantial gift, when you enter a relationship it’s worth protecting this asset by making sure there is a loan agreement in place.

Already separated? Here’s what to prioritise. You should focus on keeping your finances manageable, accessible and controllable. It’s not necessarily a great idea to say, “here’s all our assets – the house, super, share portfolio, savings, mortgage and so on – let’s just split it up in half”.

That half may not be truly half or truly equal – depending on how the asset is held – and may not be the most tax-effective way of dividing assets.

If you’re going through a divorce, be clear in your own mind about what’s most important to you in terms of financial goals (whether it be maintaining your lifestyle, long-term security or another goal).

Obviously, your lifestyle will be impacted if you have lost half the income of your household, but it doesn’t mean your expenses are going to go down, especially if you have children.

If you know what your outgoings will be, seek ways to gain control. For example, one client’s ex-husband offered to give additional money to pay their child’s school fees for all of high school up front.

However, she preferred to have the funds in her name so she could be investing that money and making financial decisions that gave her more options.

This issue of controllable and accessible assets is important when it comes to the family home and superannuation.

You might get the super fund, but remember you can’t access it until you are 65, so you need to make sure you have non-preserved assets outside super that you can access to live on.

You might push to get the family home, but if you do not have employment outside the home, what are you going to live on?

Many clients are adamant that they want to keep the family home, and we have the conversation around moving past sentimental values and working out a pragmatic asset split that allows them to have workable cash flow and liquid assets.

Pragmatism is key across the board: if you’re forcing an ex-partner to sell a property, maybe they’re not getting the right price for the property at the time.

Divorce brings many emotions into play, and you want to avoid having a financial settlement being dragged out in court, so make sure that you’ve got some very pragmatic, logical ways of splitting up the assets.

They say love is blind, but don’t be blind to the risks of not protecting yourself.
 

For more information

If you wish to speak with someone about these superannuation changes, please contact Grace Bacon or your local RSM adviser. 

Note: past performance is not an indicator of future results.

This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.

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