Can a Small Business or SMSF survive?
Mel Gibson & Robyn Moore separated after being married for nearly 3 decades, Brad Pitt and Angelina Jolie for just 12 years. Greg Norman and his first wife Laura were together for 25 years and now he is on to his 3rd marriage!
These long-married celebrity couples are far from alone and throughout Australian society this is becoming a common occurrence. Fewer married couples are making it to their 25th, 30th and 35th wedding anniversaries—even as life expectancies have increased.
We as Financial Advisers and the Divorce lawyers we work with are seeing a growing number of long-married couples call it quits. This is being termed “Grey divorce” or “Empty Nest Scenario”
As years go by, kids leave home, business demands grow and they get close to retirement age, where they will have to be near one another more, one of them usually realises they don’t want to live the rest of their life in this manner or they want to seek out new experiences like international travel, a tree change or seachange or just want to concentrate on themselves or their business.
A long-married couple that has done well financially must figure out how to divide investments, superannuation and other retirement savings, investment properties and businesses started by one spouse during the marriage. They must contend with a crazy quilt of regulations—some federal, some state and some set out by superannuation legislation.
Pulling apart all the entangled arrangements woven into a web over 20 or 30 years is difficult and stressful. But dividing a nest egg in a way that allows both spouses to retire without worry is crucial when there is little work time left to make up any shortfall.
Many of my clients are in their 50s and are getting divorced after two or three decades. But the strategy for one client can be totally different for another who is different only in age. The plan or strategy for a woman in her late 50’s who has not been in the work force for 30 years is totally different to the one for woman in her early forties with a recent employment history.
For older women negotiating a financial settlement as part of separation or divorce, that money has to last the rest of their lives. Even if they are employed, there’s usually a huge difference between the husband and wife’s remuneration packages.
Splitting up assets like shares, managed funds, bank accounts and insurance policies is relatively straightforward. But some of the largest family assets can be much trickier. Among them:
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The house. This property holds memories of children, is close to friends and represents a lifetime of effort and a haven of comfort during a stressful time. If you owned your home you felt safer than when renting. As a result many wives seek to have the home included in their part of a settlement not realizing that they will fall into that Asset Rich – Cash Poor Trap. Rates and upkeep still need to be met while the remaining assets received in the settlement then need to work even harder to meet living costs.
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The Superannuation Nest Egg. A couple’s biggest asset, aside from their house, is often the superannuation accounts and the majority of the time one account is far larger than the other. Superannuation accounts are by law in individual names, but they are still considered marital property if they were earned or acquired during the marriage. Dividing it fairly could mean the difference for a non working spouse between a secure retirement and a hand-to-mouth existence.
Self Managed Superannuation Funds (SMSFs):
Many people think because they have a family SMSF and all the money is usually pooled together for investments, that all the money is owned jointly between the husband and wife. Time to refer back to the annual statements and look at the members reports which will reflect the true ownership of the funds as it is broken down between the members.
An SMSF with just a husband and wife members who are getting divorced will almost certainly involve one of the members moving to another fund. This may involve moving the current market value of the exiting member’s account balance as well as an agreed amount of their former spouse’s account balance.
These are two separate amounts and must be treated as such. These payments require totally different reporting requirements and also probably give rise to different income tax outcomes for the SMSF fund.
It is important to ensure that these super fund tax issues are sorted out with complete accuracy so that one member does not unfairly pay proportionately more tax than the other member.
The latest Family Law provisions allow the parties to enter into an agreement at the time of marriage breakdown specifying how the superannuation interest is to be divided. However, no actual splitting occurs until a member’s benefit is paid.
The Superannuation Industry Supervision Regulations 1994 allows the benefit in most superannuation funds to be split at the time of the divorce. Therefore, two separate interests are in effect created – one for the member spouse, and one for the non-member spouse.
A division of a superannuation interest may be initiated in one of three ways.
- If both parties cannot agree on how the interest should be split, they must refer the matter to the Court. The Court will have the jurisdiction and the power to make an order about a superannuation interest that will bind the third-party superannuation trustee, or
- Parties will be able to make a ‘flagging’ agreement. It prevents the trustee from paying out any benefit to the member spouse without first asking the parties how they wish to split the benefit. Parties would need to enter into a ‘flag lifting agreement’ at a future date to terminate the ‘flagging agreement’ and provide for the division of the superannuation split. This would be used where the parties are close to retirement and would rather wait and see the exact benefit before determining how to split it.
Where an interest in an SMSF is subject to a payment split under the Family Law Legislation Amendment (Superannuation) Act 2001:
Specified benefit components will be split on a proportionate basis to the overall split.
Any capital gains or losses that arise from the creation or foregoing of rights when spouses enter into binding superannuation agreements, or where an agreement comes to an end, will be disregarded.
When dividing up the assets in an SMSF we try to have an agreement to ensure that the spouse with lower income from employment receives the highest proportion of their member benefits as liquid assets or blue chip shares rather than property or illiquid investments. Often we can look at setting up Transition to Retirement Pensions to access tax effective cash flow from 55 onwards.
The Family Business:
Mid- to late-life divorce can cripple a business started during the marriage and owned by one spouse, because the other spouse is generally entitled to a share. Tax planning measures taken during good times to be able to distribute earnings across the family may now result in the business being torn apart as each spouse seeks to extract their equity in the business. Without careful planning, the business might have to be sold to comply with those terms or the business principal may have to take on excessive debt in their late 50’s to payout the former spouse.
We recommend that couples with a small business—especially those with children—enter into a “post-nuptial” binding financial agreement that spells out what happens to the business in the event of death and divorce. Such agreements, which need to be prepared by a solicitor well versed in Business and Family Law, are recognized in most states, are increasingly being used in estate planning, particularly for people in second marriages.
Summary:
- Divorce later in life means you have to ensure you cover yourself for lifetime expenses
- See the maximum liquidity and flexibility in dividing assets especially from an SMSF where there is flexibility.
- Serious financial consideration should be made before fighting to hold on to the family home as it could become a burden you cannot afford.
- Small Business owners must plan in advance for the handling of divorce or death of a business partner.
- You need an Accountant, Financial Adviser and Lawyer used to dealing with Business as well as Family Law.
I hope this is useful information for you and we always welcome new client enquiries. Would love some feedback.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
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