Due diligence and financial advisors: does your client have an existing financial agreement?

It is very important.

A financial agreement is an asset protection tool.

Married and de facto couples in Australia can enter into a written agreement, before, during or after cohabitation or marriage, which deals with how property and maintenance will be dealt with if they separate.

Commonly, parties will agree that “separate property” is kept by the registered owner. Joint assets may be divided differently, such as 50/50.

Each agreement is different, and tailored to the parties’ needs.

The Master Plan:

Often, people will distribute family trust income amongst family members on paper, to benefit from marginal tax rates and minimise tax payable.

What happens then, when the relationship breaks down, and beneficiary loan accounts remain outstanding?

Absent a financial agreement, the inter entity loans will generally be dealt with in the wash. An asset to Party A is a liability to Entity C. The overall effect on the parties’ net asset pool is neutral (setting aside for now, any tax consequences on implementing the division).

It is common for settlement documents to provide for outstanding loan accounts to be assigned to the party retaining the entity. Those loan accounts may also be discharged to divide the net asset pool in a legal and tax effective manner.

Enter the Financial Agreement:

However, suppose Party A and Party B have signed a financial agreement. Each party retains their own “separate property” upon separation.

Party B controls Entity C. Entity C forms part of Party B’s “separate property”.

Entity C owes Party A $500,000 in beneficiary loans due to paper distributions made during the parties’ relationship.

This $500,000 forms part of Party A’s “separate property”.

An unintended consequence.

Easy Fix:

Accountants need to ask their new clients whether they have signed a financial agreement.

This information should form part of an accountant’s new client questionnaire and checklist.

The information should be reviewed regularly, and upon any major life event such as engagements, weddings, inheritances, births, or major purchases or sales.

Accountants should ensure that their tax strategies align with the intention and effect of the financial agreement.

A simple checklist question can save a nasty surprise in the long run.

Disclaimer

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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At O’Sullivan Davies, our experienced family lawyers can guide you through the property settlement process and ensure your rights are protected.

Contact us today to arrange an initial consultation.