What's mine is mine, what's yours is yours

Hey Spender, meet Saver and their property + shares portfolio...

About 48,000 Australians divorce and separate each year. It's not just something that happens to other people. It's something that can happen to you and your partner too, you never know what the future brings.

If you're in a stable relationship and contemplating the big move to living together, you need to sit down and discuss your finances and how you expect to split expenses when you're sharing a place together. Especially since the Family Law for de facto relationships changed on 1st March 2009.

Don't co-sign or guarantee anybody's loans, not your family members, nor your partner's:

Do not ever co-sign on any one else's loan. If they can't afford to qualify for the loan or purchase on their own, they'll just have to save longer for it. If you guarantee their loan, if they default, the debt collector will be chasing your ass for it! Don't ever let anyone pressure you to sign one. Don't ever sign loan contracts on the spot. If you are signing on as a witness, double check that you're only signing as a witness. Read the documents and if in doubt, get legal advice.

A friend of mine, for all her kindness and generosity, guaranteed her boyfriend's phone contract. She ended up with a $2,000 phone contract when he skipped the state and left no forwarding address for the phone company. That's a cheap mistake compared to mistakes where people have co-signed their significant other's car loan contract or credit cards. So, moral of the story is, just don't sign it.

Before moving in with your partner. Have the 'finance and money' talk.

I don't want to be the one to break up a relationship, but it will save you a lot of heartache and possibly STD (Sexually Transmitted Debt) later on if things go awry. Particularly if your partner has been hiding their debts and liabilities from you. As long as you've lived together for 6 months or longer, if you split up, our laws may have classified you as being in a defacto relationship and thus, all your assets plus superannuation fund are liable to being split by the court if the relationship goes sour and your former partner takes you to the Family Court.

• If you both have similar amounts of assets and liabilities: It's not really much of an issue to worry about.

• If you're the one with the house and the savings while your partner has no assets, you should look at protecting yourself with a BFS (Binding Financial Agreement) - previously known as a Pre-Nup. If you end up splitting, you will protect yourself against being taken to the cleaners.

• If your partner has more than you in terms of assets then if they don't bring the topic up, it's up to you whether you wish to raise the issue or let sleeping dogs lie. If however, they bring up the topic, you shouldn't get angry or upset with them, fair is fair. If you were on the other side of the fence, you'd want to protect yourself too.

• If your partner has no assets but a bunch of liabilities and debts: Three words - sexually transmitted debt. Protect yourself with a BFS (Binding Financial Agreement) - previously known as a Pre-Nup. If you end up splitting, you will protect yourself against being liable for their debts and loans. Saying, "Babe, I think we need to get a BFS/PreNup drawn up before moving in together" may not be the sweetest, most romantic thing to say but bear in mind, that when you move in together, all your assets are vulnerable to being divided in the event of a split.

• If either of you have kids from previous relationship, both of you should definitely discuss financial matters, assets and property beforehand and get a BFS drawn up.
  

What if your partner doesn't want to talk about their finances?

You could try bringing up the subject gently by saying, "Do you think we should get a BFS/PreNup drawn up before we move in together so if anything were to happen, we would end up with what we entered the relationship with?"

If that triggers a lot of anger and resentment, I'd probably avoid the topic entirely and don't even contemplate moving in with them. It's not romantic anymore if the situation turns ugly. Arguments, fights, recrimations and bitterness and for some, the desire to be nasty and take you to court.There's really no beating around the bush about this topic. If your partner is neither keen nor interested in discussing their finances with you, moving in with them probably should be avoided. Especially if you have a lot of assets. In the old days, people never moved in with each other before marriage anyway.

If you both decide to get a Binding Financial Agreement/Pre-Nup drawn up

Pre-Nups were used previously a few years ago. The problem was that they weren't recognised by the law officially so even if couples had Pre-Nups drawn up, sometimes the court would just divide things up based on the case presented at court.

With a Binding Financial Agreements (BFS) in place, provided you don't have children together and you've been together for just a few years, it's more likely that the court will uphold the BFS in the case of a split and your ex takes you to court to demand a share of your assets.

Your BFS should cover how you'll be splitting assets brought into the relationship (usually it's what's mine is mine and what's yours is yours!), how you'll split assets that were acquired and built up while in the relationship (usally a 50/50 split or some other ratio depending on who the higher income earner is and whether they're unhappy with the 50/50 ratio or not).

Ensure that your BFS has future actions, scenarios and what will happen if those scenarios were to occur and how property will be divided or retained. Other grounds that you may wish to cover on your BFS can be existing mortgages, future mortgages, kids, future loans and liabilities, personal items etc. If your financial situation changes in any dramatic or distinctive way, ensure your BFS is updated if you don't want to risk having your BFS challenged in court.

I really recommend you visit the two links below and have a good read to understand how BFS works and when they won't be binding. They also have a few case studies used as examples that will help you understand how BFS works:

* http://www.legalcontract.com.au/binding_financial_agreement.php
and
* http://www.rk.com.au/uploads/File/Binding%20Financial%20Agreements%20Article%20FINAL%282%29.pdf

If you and your defacto partner or marital spouse has not got a BFA and they are taking you to the Family Court, Elrington Boardman Allport Lawyers has outlined their Four Step Approach to defacto relationship property claims which is an interesting read.

A few important points about a Binding Financial Agreement

"The Agreement need not be fair or ‘even handed’ and can favour one party over the other. The Court will not set aside an agreement simply because it is “unfair”. This is partly because prior to signing the Agreement, the parties must each obtain independent legal advice from a solicitor, including advice as to the advantages and disadvantages of entering into the Agreement.

Once the advice is given, the solicitor for each party will attach a Certificate confirming that advice was given before the parties entered the Agreement. This prohibits parties from arguing that, at the time of signing the Agreement, they were unaware of the consequences of signing it."

Some reader questions and examples

Noel Whittaker is one of the SMH's financial specialist who excels in answering reader mailbag questions. He received a few questions from readers concerning realationships and money. This is an extract from the issue that was printed on 3/11/2010:

Reader question: I'm 40, have a good job and have never married. I own a debt-free house and have $250,000 in super. Three years ago I moved in with a man who had left his marriage and who had few assets because of his divorce. Our relationship is now rocky and I'm concerned he will get a hefty share of my assets when we break up. How can I protect myself?

Noel's reply: The Family Law Act 1975 applies to de facto relationships. Your situation matches the definitions under the Act, so you should be taking proactive steps now. Consult a family law lawyer to determine the extent of rights your partner may have against you and your estate. Your super is part of this. This should be a warning to anybody contemplating a serious relationship- taking legal advice before the domestic relationship starts could provide you with protection once a binding financial agreement is entered into.

My reflections on this: I definitely agree with Noel's advice regarding consulting the family law laywer ASAP. She might end up having to create a trust account to transfer her assets into in order to protect them. She needs an emergency plan, needs to organise double signatories on all joint accounts for all withdrawals, changing the pins on personal accounts and printing out copies of bank statements and loan statements on the date of separation. Ensure there are no overdraft facilities- if there are any, cancel all the overdraft facilities so that they can't be exploited. If there are any joint credit cards, cancel those cards and get them stopped immediately.

Reader question: You recently discussed retirees providing money for their children's house deposits. You suggested that such large gifts should be made "in the form of a registered mortgage with interest capitalised, to protect the family's wealth". What is a "registered mortgage with interest capitalised" and how does it protect a family's wealth?

Noel's reply: You would have your solicitor register the mortgage on the title deed through the relevant state lands and title department (in NSW, it's the Land and Property Management Authority; in Victoria, the Department of Sustainability and Environment), thus giving you a legal claim on the property should it be sold. You then hold the title deed, just as the bank does when you owe the bank.

By capitalising interest, the property owners do not pay you any interest but it is added on to the mortgage — the debt compounds over the years and you have the right to claim that the debt be repaid, with interest. The strategy protects the family wealth in the event that your child's marriage or de facto or same sex relationship should fall asunder and the bitter ex-partner demands half the house. Then you, as mortgagee, can have your solicitor step in and demand that your mortgage and its accrued interest be repaid before any of the remaining amount can be split between the warring parties.

My reflections on this: This is one of Noel's classic great advice. There are a lot of parents out there giving financial loans and gifts without any paperwork or registering any interest in the property. And a lot of relationships going sour where the bitter, former partner demands half of the property and more despite not having contributed a significant sum for the property acquisition. If you live elsewhere outside of Australia, you should visit a solicitor or lawyer who specialises in family law. There's nothing like laying the legal framework to protect yourself before going into relationships that may turn defacto or you ultimately marry each other.

What are the costs involved?

ResolveConflict, a family law firm provides us with a few estimates of separation costs where the other party wants a share of the property/assets:

$3000-$5000 to have the the documents prepared jointly
$30,000-$100,000 each if going through the courts
$10,000 each day, if it's through mediation involving lawyers and documentation
$15,000 each for alternative forms of dispute resolution

Going through the courts will be costly and acrimonious. If you want to still be friends and have a civil relationship(kids or no kids), the best method is always the mediation route.

I hope what I've written may help someone, someday. The law is pretty poor in respect of being unable to conserve property that was previously acquired prior to the relationship becoming defacto/married. That's the worst part of the law. That what you have worked so hard to save up and invest (over a period of several years) can be so easily ripped away by the family court when you've lived with your partner for just six months. Romance exists but on the flip side of the coin, when relationships start falling apart, things can turn really ugly, very quickly.