Statistically speaking, over 50 percent of marriages in Australia end in divorce. The largest proportion of couples separating or divorcing are those who have been married less than nine years; with the highest rate of divorce coming from men and women aged 25-29. These are sad and unfortunate statistics, however, for more than half of those who get married, this is reality.
The process of dissolution of marriage is highly stressful; mentally, emotionally and financially. Some of this stress stems from finding a new place to live, determining custody of children (if any) or paying child support. In addition, divorce means separation of all assets; including the family home, household contents, investment properties, share portfolios and even superannuation.
Most people understand the necessity to hire a lawyer throughout this process, however, many neglect to discuss their overall situation with their financial adviser.
In most cases, a financial adviser will only represent one member of the divorce, otherwise a conflict of interest will arise.
Some couples may elect to sell everything, draw a line down the middle and split proceeds 50/50, however this is not necessarily the most financially viable option. An adviser will review the overall situation, provide education and ensure their client is informed of all their options before making a decision.
Beware of Capital gains tax!
One of the main expenses associated with divorce is capital gains tax. In Australia, the family home is capital gains tax exempt, meaning there are no tax consequences when sold. Couples going through divorce need to consider the various tax consequences when proportionally dividing assets.
For example, Bob & Nancy purchased their family home in 2005 for $800,000. It has recently been valued at $1.5 million. They also jointly own an investment property valued at $1.5 million, which was purchased for $1.2 million in 2015.
Their separation has remained amicable so to keep things simple, they agree to take one property each which they will sell at their own discretion. Bob takes the investment property and Nancy takes the family home. Seems fair, right? Not necessarily.
If Bob sells his investment property for the market value of $1.5 million, he will have registered a capital gain of $300,000 ($1.5 million – $1.2 million). As the home was purchased more than 12 months ago, he is eligible for a 50% discount. Therefore, $150,000 would be added to Bob’s assessable income in the financial year the property was sold. If Bob is on the highest marginal tax rate of 47%, he will be required to pay capital gains tax of $70,500, leaving him with a net return of $1,429,500.
On the other hand, Nancy has also sold her property for $1.5 million, however the principal place of residence exemption will be applied. Therefore, no capital gains tax is paid and Nancy has a net return of $1.5 million, $70,500 more than Bob.
In this circumstance, a financial adviser would have identified the potential issue with Bob and Nancy’s plan and been able to ensure Bob was aware of the potential tax implications he would face when selling the investment property.
Consider the impact on estate planning
Another important consideration for couples going through a divorce is estate planning. A divorce can take time to finalise and during this lengthy process, it is not uncommon for one party to find a new partner. This can cause problems when an existing Will stipulates all benefits should be paid to the soon-to-be ex partner.
During the separation, Bob and Nancy decide their Will should be changed and 100% of their assets should be bequeathed to the children, rather than each other. Prior to their respective wills being updated, Nancy meets someone new and commences a defacto relationship. At the same time, Bob falls unwell and passes away prior to updating his will. In this situation, Bob’s estate may be passed to Nancy which in turn, could fall in the hands of Nancy’s new partner.
This scenario is more common in superannuation as the death benefits of Super bypass an individual’s will. If Bob had made a 100% binding death benefit nomination to Nancy, even if his will was updated prior to his passing, the trustees of his Super fund would be forced to pay 100% of the Super death benefits to Nancy.
Remember to review your personal insurances
Further to this, insurance plays an important role for both parties going through divorce. Individuals may have previously relied on their partner in the event of illness or injury when unable to work, however with a full separation, they must ensure they are self-sufficient. This may call for individuals to consider covers such as income protection to ensure they have an ongoing income to meet their living expenses if they are off work for a period of time.
Reviewing your insurance requirements and ensuring that all beneficiary nominations are up-to-date are small but effective ways to reduce some of the financial stress which will be experienced during a divorce.
Following a divorce you may wish to have the benefits from a life insurance policy paid to a new beneficiary, if these are not updated and you were to die funds may be paid to a former spouse rather than to the individuals you intend the funds to go to such as a new partner or your children.
It is important to speak with an insurance specialist during this time to make sure benefits are going where you want them to be paid and you have appropriate levels of cover in place in the event of death, sickness or permanent injury.
If you would like any assistance or advice regarding divorce and divorce finances, our specialised medical financial services advisers, insurance & tax consultants can help. Request a no-obligation consultation here.
You may be interested to read other articles on this topic:
Doctors and Divorce – Managing the financial impact of divorce in the medical profession
Doctors and Divorce – A medical accountant’s guide to separation
Doctors and Divorce – Understand the legal journey ahead
Disclaimer: * The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.