Relationships: Divorce, new beginnings and blended families

When a relationship breaks down, finances usually aren't top of mind. But it's important to protect yourself so your heartache isn't compounded by financial hardship. This is part two of our series on relationships and money.

Stage 3: Divorce and protection

In many cases, though not always, couples have a pretty good idea that their relationship is on its last legs and the question becomes 'when', not 'if', to call it a day.

The process of disentangling a shared life is not just emotionally difficult, it can also be financially devastating.

The Australian Institute of Family Studies found that although women are more likely to initiate divorce, they are far more likely to suffer financially, especially if children are involved, which is the case in one in two divorces.

Mothers typically take the major responsibility for raising children. In doing so, their job advancement (and income) is often put on hold.

This can make it worth thinking about counselling as a possible means of salvaging the relationship. Organisations such as Relationships Australia can provide low-cost services that allow couples to share a non-judgmental space.

Dividing up your life together

If you know the relationship is over, it's time to get down to the nitty-gritty of dividing everything you have accumulated as a couple. Two points are worth noting.

First, when it comes to a property settlement, all the assets owned jointly and individually will be pooled and divided.

Squirrelling away assets before you separate won't prevent them being added to the pot of property to be divided.

Similarly, embarking on a massive spending spree using your former partner's credit card is likely to be counterproductive. The money could just be deducted from your share of a future property settlement.

The other issue is that in Australia we have 'no fault' divorce. As galling as it may be, it doesn't make a difference to a property settlement if your ex has had multiple affairs while you have remained faithful throughout.

An exception, according to Ian Shann, is where the relationship has been marred by family violence, which can shape how property is divided.

He says that, in general, under the Family Law Act a property settlement will be determined by a three-step process that looks at:

1. The value of the pot to be divided (the 'pot' being assets less liabilities, or debts)
2. The contributions of each person, including non-financial contributions such as renovations to a home or caring for children and doing housework, at the beginning and during the relationship 
3. Whether there are any special factors (such as future needs) that should be considered in determining the financial split.

Shann notes that without a binding financial agreement (BFA), if you cannot decide together how your property will be split, the Family Court will make the decision based on the points listed above.

And it's a fair bet you could end up with a settlement neither of you is happy with. Moreover, the cost can be prohibitive.

"Disputes that go to trial in the Family Court can take several years to settle and cost more than $100,000 per person," warns Shann.

"When a relationship breaks down, parties should seek to have financial matters resolved as quickly, simply and inexpensively as possible.

"Get legal advice about how the law is likely to work, but then get matters resolved as amicably as possible by using an alternative dispute-resolution process like mediation. It will be quicker, less expensive and less confrontational, and allow you to move on with respect, which is really important if you are co-parenting."

Shann adds that a family mediation can cost each party around $1500.

How your assets are valued 

The million-dollar question facing many separating couples is who gets what. These days, it really can be an issue worth $1 million - often considerably more. With so much of our wealth seemingly up for grabs, it's at this stage that the true cost of divorce can hit home.

While a 12-month separation is required to apply for a divorce, you can get started on the property settlement straightaway. And it's worth forging ahead with it.

The assets to be divided will generally be valued as at the date of your settlement (the family home may require a formal valuation).

The main point is that anything each person owns up to the date of settlement is officially up for grabs.

If, for example, you win the lottery after separating, or score a six-figure redundancy payout, it can all go into the pool of assets to be shared. In this way, dragging the chain doesn't just make it harder to put the whole thing behind you, it can also end up costing you more than expected.

Cracking the super nest egg

Superannuation goes into the assets to be divided, though it is subject to special treatment.

That's largely because super is held in trust and can't normally be accessed until preservation age, which is 60 years for those born on or after July 1, 1964.

Once you know the value of your combined super savings, you need to determine how to split the benefits.

On this score, couples have a few options:

• Divide super savings on the spot - you can choose to divide up your combined super savings through a split that states how the total pool of savings will go to each person, for example, 50:50 or 80:20 or whatever you agree on.
• Defer a decision to a future date - in this case, a super account will be 'flagged', meaning the trustee is advised not to make any payments from the fund until a future date.
• Skip taking a share of super altogether.

Dividing your super on the spot allows everyone to get on with their lives. However, unless you have met a condition of release - normally this means reaching preservation age - the money remains in the super system. So, it won't be available to pay bills today.

Even so, your future self will thank you for including super in a property settlement. This especially applies if you have limited super of your own, which may be the case if you have spent time out of the workforce raising children or caring for ageing relatives.

Taking care of children

With close to half of every divorce involving children, caring for the kids is something most couples are likely to face following a break-up. Family law sets no hard and fast rules about which parent a child will live with. Rather, a court will assess what is in the 'best interests of the child'.

Here, too, a lot of time and money can be saved working things out amicably with your ex.

If you can't, Ian Shann explains that it is a legal requirement for couples to undertake alternative dispute resolution - that is, mediation, before they head off to do battle in the Family Court.

"Mediation is a prerequisite to court proceedings because it has a high success rate, and this significantly reduces the number of cases that would otherwise end up in litigation," says Shann.

"Around 80% of couples get care of children sorted through mediation. Only 20% end up in court."

Navigating child support

Similarly, both parents have a duty to support their kids financially after separation. This applies regardless of who the children live with. This support can take a variety of forms including:

• cash payments made direct to a parent
• non-cash items, such as paying health insurance or school fees or
• a combination of cash payments and non-cash items.

Child support can be a contentious issue between separating couples as it can be viewed as a thinly veiled form of 'alimony' or spousal maintenance (which it isn't).

Shann notes, "It's not uncommon for a parent to seek that children spend more time with them, thinking this might reduce the child support for which they are assessed," says Shann.

"Perhaps they might consider that it will probably cost more to have the kids with them for that extra time than the savings in child support."

The common thread is that child support can call for negotiations on both sides. Parents who can't reach an agreement can apply for a child support assessment by Services Australia. The formula used is complex, but broadly speaking, the end result is based on:

• each parent's income 
• how much time each parent cares for the child
• the child's age.

If you plan to work out child support yourselves, it pays to think long term. Child support normally ends when a child turns 18, but the cost of raising kids can extend well beyond this.

Stage 4: Re-partnering and blended families

Despite the dubious odds of a second marriage being a long-term coupling, there is no shortage of people who emerge from a broken relationship eager to try their hand at another.

One in four marriages involves couples who've already walked down the aisle at least once before. Many more will enter a new de facto relationship.

While our capacity to commit to new relationships is seemingly endless, things are undeniably different second (or third) time around. It's not so much that we are more jaded or less starry-eyed. The fact is that people often have more to lose.

The average age at divorce is 47 for men and 44 for women. By this point in life, couples have often built significant assets.

Separation can mean halving those assets. When it comes time to enter a new relationship, we can, understandably, be keen to protect what's left.

One possibility to protect remaining wealth is through a binding financial agreement.

We noted earlier that this isn't a common option among first-time couples. But Elise Fordham, principal lawyer at Australian Family Lawyers, says she sees more of an interest in BFAs among couples who are re-partnering.

"The overarching theme in the consultations with these clients is wanting to try to protect themselves from the stress of another unpleasant divorce, or wanting to protect their assets for their children," she says.

"We also see people later in life wanting a BFA and estate planning documents so they can ensure their accumulated wealth will be passed onto their children when they pass away."

What to talk about this time 

Fordham suggests anyone considering re-partnering should have "very open and honest conversations about money before 
you cohabitate".

She recommends talking in detail about your incomes, expenses, money goals and whether you will keep your finances separate or combine them.

Also up for discussion is what will happen if one person loses their job or wants to retrain for a new career, and how bills will be paid if you have a child.

"We have seen many people come to us after a separation where they came into the relationship with wealth, or they have accumulated wealth during the relationship. They have felt used by the other person squandering it - by not working to their potential, or starting several failed businesses that have wasted funds, and they then need to go through the property settlement process," says Fordham.

She adds that a BFA can make a lot of sense for those finding love later in life.

"You set out the terms of the division of your property and finances early on - either before you get into a de facto relationship, or before a marriage, or during a relationship."

Stage 5: Setting up an inheritance 

For adult children watching their parents re-partner, it can be easy to think "there goes the inheritance". And there can be a certain amount of truth to this.

One of the challenges of second and subsequent relationships lies in providing for children from a previous relationship.

It's an area that can be fraught with peril. For blended families, having an up-to-date will may not be enough.

Wills can be - and often are - subject to legal disputes. This is not a 'lifestyles of the rich and famous' issue. One Australian study found that 60% of contested estates are valued below $1 million and just over half are worth less than $500,000.

Fortunately, there can be solutions. Fordham says these include having a BFA with your new partner, which sets out who keeps what if you separate, or a "well thought-out estate plan, which would include a will and placing your assets in a testamentary trust".

Another possibility is nominating dependent children in a binding death nomination for your superannuation or through a life insurance policy that lists your children as the beneficiaries."

Even so, Lindzi Caputo, wealth management director at HLB Mann Judd, says the division of assets can be complex in blended families, especially where there are children from previous relationships plus children from the current relationship.

"It's important that each partner considers how they would like their share of the family wealth distributed - firstly if their partner survives them, and then also upon the passing of the surviving spouse," says Caputo.

It can be complex stuff. Just to add to the mix, Caputo says: "Consider the portion of the estate you'd wish to be distributed to children. For instance, are you happy for all children of the family to receive an equal share of the family assets? Or would you prefer each partner's share to be split among their own biological children?"

As every family is different, Fordham says: "Your options are best discussed in unison with a specialist family lawyer and a specialist wills and estates lawyer to cover off all bases."

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