What is the best way to protect assets against a relationship breakdown?

A relationship breakdown generally means that both parties will want to protect their assets and ensure that property is split between the parties fairly during the property settlement process.

Thus, it is important for parties to know how to best protect their assets in the event that a relationship breakdown occurs.

Examples of effective ways of protecting assets against a relationship breakdown include creating a Binding Financial Agreement and using trusts. 

The property settlement process 

A property settlement is the process by which assets and liabilities are divided among the separating parties in a relationship. The process involves several stages:

1. Determining the asset pool (including any debts and liabilities)
2. Considering the financial and non-financial contributions of both parties to the relationship
3. Considering the future financial needs of both parties 
4. Ensuring that the resulting property split is fair and equitable in the circumstances. 

Binding Financial Agreements and trusts protect an individual’s assets differently. This article will first examine Binding Financial Agreements before turning to trusts. 

Binding Financial Agreements (BFA)

A Binding Financial Agreement (BFA), otherwise called a prenuptial agreement, is an effective way to ensure that an individual’s assets are protected in a relationship breakdown. A BFA is essentially a binding contract between two parties which determines how property will be split if a separation occurs. A BFA can also include other financial matters, such as spousal maintenance. 

How does someone enter into a BFA? 

A party can enter into a BFA at any stage during the relationship, including when it has already broken down. However, it is generally recommended to try and create a BFA when the relationship is going well, as this can mean that both parties are happier and more comfortable dividing the assets between each other. Whilst this may seem like an uncomfortable topic, BFAs protect individuals from the uncertainties of property settlement, particularly when they are left for the Court to decide. BFAs also allow the parties themselves to negotiate and hence they are able to give more input into how property should be split. 

Arguably the most important characteristic of BFAs are that they are legally binding. Because the creation of a BFA requires that both parties seek independent legal advice, it is generally assumed that each party knew of the advantages and disadvantages of entering into a BFA and with this knowledge, still intended to be legally bound to the obligations within the contract. 

After a signed copy of the BFA is given to each party and is confirmed by both parties, the BFA becomes legally binding. As a BFA is very difficult to change, it is generally an effective method of protecting assets. 

Family trusts 

A testamentary trust is a type of trust that is made under a valid will. A trust can protect assets in the event of a relationship breakdown if: 

• Someone has left a testamentary trust to a party in the relationship breakdown; and
• The party to the relationship breakdown has no control over the trust (meaning that the trustee is not the person in the relationship); and
• This trustee has complete discretion over how assets held in the trust are to be paid and to whom. 

If a trust has these characteristics, it is likely that the Court will not include the assets held within this trust as part of the overall asset pool. This is because the trustee (who is not part of the relationship) is the individual who determines how the assets in the trust are paid out. 

An example of how a testamentary trust protects the wealth of an individual against a relationship breakdown is evident in a 2019 case heard in the Family Court. 

This case concerned a property settlement dispute between a husband and wife. The husband was left a testamentary trust which specified his sister as the trustee. The wife unsuccessfully argued that the trust was part of the asset pool as the Court regarded that the husband did not have any legal title to the assets within the trust. Instead he was dependent on the trustee, who had sole discretion in determining trust distributions. 

Hence, whilst the Court found that the trust was a financial resource of the husband’s, it did not see the trust as part of the overall asset pool to be split. This meant that the wife had no rights to claim any assets within the trust. 

If you need any assistance regarding your property settlement dispute and the protection of your assets please feel free to reach us via the contact form.