Divorce Property Settlement and Asset Protection

Legal and financial advisers often recommend that assets be held in the name of the spouse with the lower risk profile.  This is a simple but effective asset protection mechanism because it means that assets will be protected if the spouse with higher risk profile is sued.  Unfortunately people are not aware of a potentially disastrous situation that can arise where a divorce property settlement is delayed and most of the assets are “protected” in the name of the other spouse.

The fact that most of the assets are in the name or control of one spouse is generally not a problem where the couple divorce and sort out the division of assets by consent or by Court order.  However, a significant problem can arise where couples separate or divorce and prior to dividing assets the impoverished spouse dies or loses his or her mental capacity.

The decision of the High Court of Australia in Stanford v Stanford [2012] HCA 52 (15 November 2012) and that of the Full Court of the Family Court of Australia in Estate of the Late Carney and Carney [2019] FamFcc 166 4 October 2019 provide some take home messages in relation to this and other issues.

5 Reasons to Get On With Divorce Property Settlement and Make a New Will

  1. Because matrimonial divorce property settlement proceedings can be continued by a Legal Personal Representative it is important that upon separation from a spouse or domestic partner you review your Will. You should ensure that you have appointed an Executor who is not your former partner.
  2. Divorce or the end of a Registered Relationship will revoke certain provisions in a Will made before the Divorce or end of the relationship therefore it is crucial to prepare a new Will after you become divorced or terminate a Registered Relationship.
  3. It is very important upon the breakdown of your marriage or de facto relationship to finalise the divorce property settlement between you either by consent or if necessary by way of application made to the Federal Circuit Court or Family Court as soon as possible;
  4. If at the time of separation or shortly thereafter your ability to continue the matter into the future is compromised due to age or terminal illness court proceedings should be commenced as soon as possible because only matters that are already before the Court can be continued by a Legal Personal Representative.
  5. The Family Law Act can operate on a testator’s freedom of testamentary capacity in much the same way as the Inheritance Family Provision Act.

The High Court’s Decision in Stanford

The decision of Stanford is widely considered important as establishing as paramount to matrimonial and de facto property settlement matters the “just and equitable” test as the first consideration that a Court should have when asked to apportion the assets of the parties to a relationship following the breakdown of that relationship. However the decision also highlights an emerging trend in matrimonial settlement matters. This trend relates to applications made to the Federal Circuit Court or Family Court for orders redistributing the assets of the parties to a marriage where the separation that triggers the application occurs involuntarily because one of the parties to the marriage has been admitted to full time residential care. One could perhaps characterise these matters a quasi inheritance claims.

The High Court delivered its judgment in the Stanford matter in 2012. The matter had had a lengthy history in the Magistrates Court of Western Australia and then the Full Court of the Family Court. In Stanford the initial application was brought by the daughter of the wife. Mr and Mrs Stanford had married in 1971. It was the second marriage for both the husband and the wife. They each had children to their prior marriages.

The matrimonial home of 37 years was registered in the sole name of the husband. He made a Will leaving his estate to his children and a life interest in the matrimonial home to the wife. The wife had made a Will leaving her estate to her children.

In 2008 the wife suffered a stroke and was admitted to full time residential care. The husband had set aside a fund into which he was also contributing to meet the costs of the wife’s care. The wife’s daughter as Litigation Guardian brought an application in the Western Australia court seeking Orders that the former matrimonial home be sold and the proceeds of sale be distributed 50% to the wife and 50% to the husband. Interestingly the wife, who did not have legal capacity, did not ask the daughter to start the Application and on the husband’s argument her care needs were being met by him. The Magistrate at first instance made orders that apportioned the matrimonial assets 57.5% to the husband and 42.5% to the wife. The husband appealed to the Full Court of the Family Court. The wife died after the matter was heard by the Full Court but before judgment was delivered.

After considering submissions made by the parties the Full Court ordered that upon the husband’s death the wife’s estate is entitled to an amount equivalent to 42.5% of the asset pool. The husband appealed to the High Court.

One of the husband’s arguments on appeal was that the lower courts did not have jurisdiction because the marriage was an “intact” marriage and that the only people to benefit from the intervention of the lower courts were the children of the deceased wife and therefore the proceedings were not a matrimonial cause but something akin to a quasi Inheritance Family Provision matter.

The High Court held that the lower courts did have jurisdiction to hear and determine the matter. The High Court rejected the husband’s argument that the Court could only intervene in circumstances of an irretrievable breakdown of a marriage which occurred at the instigation of one or both parties to a marriage as opposed to an involuntary separation caused in circumstances such as confronted the husband and wife in Stanford.

The High Court went on to find that the Full Court of the Family Court was right to overturn the decision of the Magistrate at first instance because they failed to give proper consideration to the effect of the orders on the husband which would be that his home of many years and in which he continued to live would be sold. However, the High Court found that the Full Court erred in making the orders that it did because in doing so it did not properly apply the provisions of section 79(8) of the Family Law Act which stipulates that when making an order in circumstances where one of the parties to the marriage is deceased the Court must consider the Order it would have made had the party still been alive and whether in all of the circumstances it is still just and equitable to make the same order.

The High Court overturned the Orders of the Full Court and dismissed the Application brought on behalf of the wife and continued by her Legal Personal Representative. The effect of this outcome from an estate point of view would be (unless the husband altered his will) that all of his estate would fall to his children and the wife’s children have no inheritance. If the earlier judgements had been upheld then the wife’s estate would have been comprised of her 42.5% share of the matrimonial property.

The Family Court’s Decision in Carney

On 4 October 2019 the Full Court of the Family Court delivered judgment in the matter of Estate of the Late Carney and Carney [2019] FamFcc 166 4 October 2019. The fact scenario in this matter is remarkably similar to that in Stanford.

The husband and wife in Carney married in 1989. This was a second marriage for both of them. They each had children from their prior marriages. In 2017 the husband was admitted to a nursing home. In 2018 the wife brought an application seeking Orders for the division of the matrimonial assets. The litigation was conducted on behalf of the husband by a Litigation Guardian. Shortly after the application was commenced a Litigation Guardian was appointed for the wife. The husband died in 2018 and the proceedings were continued by his Legal Personal Representative.

The wife had assets in her name which included bank funds of about $65,581.00 and a Refundable Accommodation Deposit (RAD) which was purchased in 2018. She received a pension of about $458.00 per week of which 79% was spent on her Daily Care Costs. Her actual care costs exceeded her income by about $82.00 or $87.00 per week.

The husband owned in his sole name the former matrimonial home. It was sold in early 2019 realising $935,000.00.

The primary judge made orders that there be an adjustment in the wife’s favour of 10% taking into consideration her ill health and ongoing care costs. This meant that the wife would retain 60% of the asset pool and the husband’s estate 40% of the asset pool.

The Legal Personal Representatives of the estate appealed. One argument on the appeal was that the adjustment of 10% in favour of the wife’s favour was excessive. This argument was rejected by the Full Court.

A second argument raised by the appellants was that the Court should take the terms of the husband’s Will into consideration. The Husband had prepared a Will which left his estate (the house in his sole name) to his children and life interest to the wife. If the house had to be sold to provide accommodation for the wife then the husband’s children took the residual accommodation deposit in remainder.

The Full Court rejected this argument and held that a testator’s intentions do not override the considerations mandated by Sections 79(4) and 75(2) of the Family Law Act.

The effect of the decision in Carney from an estate perspective is that the wife’s children from her prior marriage potentially gained a windfall. Prior to the decision the wife’s estate would have been comprised of her meagre bank funds if not depleted prior to the date of death and any residual amount from the RAD (if any). As a consequence of the decision the wife’s assets were bolstered by a payment from the proceeds of sale of the husband’s home in an amount of $415,283.00.

The take home message from these cases is clear – if you are contemplating a divorce property settlement make sure you look to resolve the property division and make a new Will as soon as possible.  If you delay, and particularly if the majority of assets are in your ex-spouse’s name, your estate may miss out if you die or lose your mental capacity.  Particularly with blended families where families have utilised asset protection mechanisms, the parties would be well advised to obtain specialist legal advice and consider the potential benefits of mutual wills.

For further information please contact Michelle on 8362 6400 or email Michelle CrichtonJoin our mailing list to receive updates and advice on current issues.

  • Michelle Crichton

    About the author: Michelle Crichton

    Michelle is a specialist lawyer in wills and estates, divorce and injury matters. She has a strong track record in achieving excellent results.

    Michelle's legal knowledge is excellent and she has a strong commitment to client service. She is fiercely protective of her client’s rights and works hard to ensure her clients receive the best outcome.

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