This article was written in partnership with Entrust Private Wealth Management
Why? Because unpicking years of merged finances needs expert support, and sometimes the best results for your family come when your taxation accountant and financial advisor work alongside your family lawyers.
It’s called collaborative practice, which is a dispute resolution process designed to help people stay in control of their financial decisions — and stay out of court.
In collaborative practice, both you and your former partner, your respective lawyers and other professionals commit to work together to come to an agreement using a cooperative problem-solving approach.
Here are the key significant areas where your accountant and financial advisor can add value in this process.
1. The structure of your finances
It is common in many relationships that one partner is the more responsible party for finances, whether it is understanding the bank accounts and bills right up to the use of private companies, family trusts and self-managed super funds.
The other party may not understand or fully understand how these entities operate or what funds are invested where.
An independent tax accountant can explain who has control of the entities, how you should value shares, beneficiary interests or member balances within them and the tax effect of the different structures.
Knowing this gives both parties a fair basis for moving forward.
2. Your advisory relationship
Just as one person often does the books, the same person may have the key relationships with people such as accountants and financial advisers. As a result, the other member of the couple may need to assess if they are better with an alternative adviser for their financial needs. Generally speaking, all parties involved would prefer a level of separation between the financial affairs of the separated couple so that privacy and conflict is appropriately managed.
3. Issues around taxation
There are some common issues frequently seen in financial separations.
These include Division 7A loans — loans from private companies to shareholders. These loans need to be repaid but there is complex taxation legislation around their repayments. This is even more complex when private companies interact with family trusts and corporate beneficiaries. It’s vital you make sense of these early in any dissolution of a relationship.
A second issue is contingent tax liabilities: retained profits in private companies that may lead to top-up tax issues.
Finally, capital gains tax (CGT) rollover relief is available under certain Family Law situations. But you need to understand the circumstances in which these rollovers will apply to take advantage of the relief — and know when CGT rollover relief will not apply, which could trigger liabilities and transfer duty.
Understanding what a business is worth can be crucial in understanding how assets might be divided or sold and there are various methods that can be used to value a business. Your accountant can advise on which method is appropriate and help assess value, today and into the future.
Prior to a separation, the mix of investments would have typically reflected one member of the couple’s preferences or been a blend of both. Following a separation, it’s time to review to ensure what remains is appropriately positioned to reflect your level of risk and revised objectives.
It’s also a good time to review your financial goals, recognising that a separation can wreak havoc on your cash flow and future plans. You will need to review your targets and reassess how you are going to get there.
Following a separation, your insurance needs are likely to change. Members of double-income families will no longer be able to rely on their spouse’s income if something were to happen to them while the working dynamics may also change. Such circumstances require a review of insurance to ensure it remains appropriate and protects your new outlook.
7. The state of your estate
Separation is a key trigger to review your estate plans to ensure that it continues to reflect your needs and intentions. Your estate planning is more than simply a Will. Assets such as superannuation, joint assets and discretionary trusts do not form part of your estate and therefore require specific attention. There may well be another partner on the horizon and therefore a combined asset pool. This needs to be carefully delineated, particularly when there are children involved.
Years of merged finances creates another level of complexity during an already sensitive time. Having a financial advisor and taxation accountant in your corner won’t take the sting out of divorce, but it will ensure your financial affairs are properly considered.
Julie Strack and Simon Montgomery are both collaboratively trained professionals and are members of the Collaborative Professionals WA Inc.
For information on how you can break up together click here.