By Anthony Bell, Finance ExpertThere’s no doubt that finances and relationships can be a volatile mix. We asked Finance Expert Anthony Bell what happens to your money if your relationship breaks down. He also explains pre-nuptial agreements and the tax and wealth creation benefits that a relationship can bring.
It may not sound romantic, but with a significant proportion of relationship breakdowns caused by monetary issues, it seems that the best way forward for people in a long-term relationship is to be open and direct with each other on their finances. Of course, there really is no right or wrong answer as to how to deal with money issues as every relationship is different.
There are steps you can take to create greater financial certainty in the event that the relationship ultimately fails. For some people, this can be positive thing as this certainty can in itself take away a pressure point, but for others it can work the other way and create doubt about how one partner truly feels about the other.
First, a few facts if things don’t work out…
The rights for individuals are pretty much the same for people who are in a relationship and cohabitating as compared to those who are married. Defacto couples are usually entitled to the same rights as married couples if they have been in their defacto relationship for two years. This period can be lower in certain circumstances, particularly if there are children involved.
Financial settlements are handled through the Family Court for both married and defacto couples. In most cases, agreements are reached between the couples on the terms of the financial settlement (called a Binding Financial Agreement) and are then approved by the court.
Where an agreement can’t be reached, the matter can end up in court. This should always be a last resort as the costs, time and emotional damage it can cause are often just not worth it.
Even if you do agree on the terms of a financial settlement, both parties should still obtain independent legal advice before signing off on the agreement.
So what are your options if you want to get greater certainty up front in the event that the relationship fails?
Pre nuptial agreements
The safest and surest way for all couples (whether married or living together) to protect their assets is to enter into a binding financial agreement or pre nuptial agreement before the marriage takes place or before the defacto relationship becomes long term.
Agreements like these were once the domain of mostly very high net worth individuals, such as movie stars and business tycoons, who wanted to protect their hard earned assets, but these days they are much more common place in the general community.
This agreement will document what each party is entitled to financially if the relationship fails. Whilst it does not have to be completed in consultation with a lawyer, the agreement will have to be put in an approved court format by a lawyer for approval. By entering into a binding financial agreement, it gives both parties some peace of mind about how assets will be treated if there is a breakup.
Are agreements like these right for everyone? Not necessarily. Each couple must make their own decision, but there is no doubt that such an agreement can avoid a huge amount of heartache down the track as unfortunately it is a well known fact that around half of first-time marriages will fail.
3 money tips to increase harmony in the home:
If couples prefer to be less formal about their finances, here are some tips you can use to help maintain harmony:
- Each party to the relationship should have their own independent spending money. That is money that is only for them and does not need justifying to the other partner when spent.
- Create a common pool for both people to contribute into to pay for household bills/food, or the rent or mortgage etc.
- This account can also be used to allocate funds for holidays and other major purchases.
What about investments and wealth creation?
When it comes to investments and wealth creation plans, the strategies are a little more complex as they are driven more by tax and long term prosperity than relationship harmony.
It has to be accepted that when embarking on wealth creation strategies that any relationship breakdown will bring the strategy to an end and the assets will be split according to any agreement reached.
Tax benefits
There are significant tax benefits that are available to relationship wealth creation plans. Some of the strategies that can be employed include: investing in the name of the person who is the lowest income earner. This will ensure that any interest etc will be taxed at a lower marginal tax rate. Potential capital gains tax will also be minimised as you are taking advantage of this person’s lower tax rate.
Superannuation
When there is an age difference in the relationship, couples should consider superannuation contribution splitting to direct more funds to the older person. This essentially means funds can be access out of superannuation sooner. Under current rules, a person can direct up to 85% of their employer and salary sacrifice contributions to a working spouse who is under age 65.
With all of the above being said, you should not let money issues alone control where a relationship is headed. Love, honesty, trust, transparency and faith are the corner stone of lasting relationships and will overcome any monitory problems that come your way.
As always, if you would like more guidance on an appropriate strategy regarding your finances, you should seek professional advice that takes into account your specific circumstances.
For more advice on investment, read Dale Gillham’s golden rules for investment and financial independence.
