In this episode, Ben and Heather turned their attention to money, assets, debts and the importance of financial planning during and after divorce. They were joined by financial planner Brett Martin from Harbour Wealth Management. A certified financial planner for over 12 years, Brett has been helping clients on the Coffs Coast to manage their wealth since he became principal at Bridges Financial Services in Coffs Harbour in 2011. Recently Brett has moved from under the Bridges umbrella to establish his own practice, Harbour Wealth Management.
Brett’s financial planning expertise combined well with Ben and Heather’s specialist family law knowledge to answer these critical questions:
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Benjamin Bryant: Hello everyone and welcome to Episode 25 of The Family Matters Show, the podcast that answers your questions about divorce and separation. I’m your host, Benjamin Bryant, and I’m here again with my business partner and family law expert Heather McKinnon, who has recently returned from a trip exploring the Lord Howe Island. Good to have you back Heather. How was your trip?
Heather McKinnon: Well, it was fantastic. I mean, it’s incredible to think we have that World Heritage area just off the coast here. While you guys were dealing with that cold snap, we were snorkelling. It’s such a weird thing that you can have those warm currents up on the edge of Australia in winter. So, yeah, really feel refreshed. It was a brilliant break.
Benjamin Bryant: Well, I’ve heard enough. Today we’re going to talk about financial planning during and after divorce and separation. So it’s good that you’re well rested Heather when we tackle this difficult and important subject. And luckily, Heather, you don’t have to tackle it alone. We are joined here by Brett Martin from Harbour Wealth Management. Brett has been a certified financial planner for over 12 years and has been the principal at Bridges Financial Services here in Coffs Harbour since 2011, where he has helped his client base to plan for retirement and manage their wealth. Recently, Brett has moved from under the Bridges umbrella and will be establishing his own practice Harbour Wealth Management, which will continue to operate from the offices on Earl Street in Coffs Harbour. Changing a brand is a big job Brett, we know, on top of everything else you need to do. So we’re very grateful that you’re here to be able to make the podcast this morning. Welcome.
Brett Martin: Thanks, Ben. Happy to be here. Thank you again for inviting me.
Benjamin Bryant: Excellent. Thanks for being here. We better get started because we’ve got stacks to talk about. But first, I want to remind everyone that they can send their questions in confidence to familymatters@bryantmckinnon.com.au or message us on Facebook. Also, please do share this show with any family and friends starting down the track of separation. It’s great if we can provide answers and information as early in the process as we can. Heather and Brett, are we ready to go?
Heather McKinnon: Yup.
Brett Martin: Yes.
Benjamin Bryant: Our first question. Disagreements about money can actually lead to divorce or separation. Brett, do you have any tips for couples on how they can make financial plans that avoid disputes in the first place?
Brett Martin: I think first you need to recognise that quite often people have differing opinions and attitudes about money when they come together. Those attitudes are often formed by experience from the parents, their upbringing. Too often I see one person in a couple, typically the male, not always, take control over the family finances with the partner showing very little interest along the way, and that can often be a recipe for disaster. Therefore, I think it’s really important that both people in a relationship take responsibility to understand just what money is coming in and how it’s going out. Whether it’s a budget or what those big-ticket items are being spent on. I’ve seen situations where, in a couple, one will just go out and come home with a new car and…
Benjamin Bryant: Not even a conversation,
Brett Martin: Not even had a conversation about it. There’s been a flip of cars. And again, that causes huge stress fighting within a relationship.
Heather McKinnon: We see it every day. I mean, it still amazes me how many people I see who have no idea what their spouse’s income is. They don’t have any history of budgeting and often it’s at separation when they’ve first got to work out how to live. It is really interesting in this day and age, isn’t it, that financial literacy is really poor?
Benjamin Bryant: That’s right. What’s interesting Brett, is you use the word control. I think that’s a big, big sound bit at the moment. The controlling of the finances. And look, there’s different personality types. I know in my business life, I’m all about the figures. I’m very conservative. I know what’s coming in and what’s going out. But at home, I have no idea. I have no idea. But that’s also my choice. I know I’ve got access to the accounts, I can see. But I actually don’t know what the weekly mortgage repayment is or what the personal loan thing is or what… I don’t know. Luckily I’ve got a partner that does that for me. Heather, you come from a relationship of reverse traditional roles?
Heather McKinnon: Yeah. Although we learned 30 years ago we started a habit of every fortnight sitting down on a Tuesday together after dinner and doing our cash flow, looking at what we had ahead of us for the week. And as young people, we learned how to manage cash flow and our children then observed that, that every fortnight mom and dad sat down and did that job. And I think it’s a really healthy habit to get into. But it freaks me out when I say to a client, well, you’ve got to do a weekly budget and they’ve never done one. They have no idea. I noticed the other day, that the politicians are starting to talk about curriculum development and that all Australian school students should be given some basic financial literacy skills. But as Brett knows at the front line it is pathetic really, how many people have none.
Brett Martin: I believe the Barefoot Investor, Scott, I forget his last name, has just been introduced some sort of curriculum for the schools and going to start putting that through the schools, which is fantastic. I mean, it’s crazy to think that we have this thing called Super that’s been with us since probably the mid 90s. It’s going to be people’s most important asset when they retire, yet they don’t teach it at school.
Heather McKinnon: And I notice that legislation went through last night in parliament, which is going to mandate that we can compare super funds, which is another really interesting development so that we can actually now start to compare funds really simply once it’s all enacted, which is another big move for Australia to grow up, I suppose.
Benjamin Bryant: Heather, I know we spoke about it a couple of times, but even as recently as last month’s podcast’s, you and I were talking about how shocked we are that when we get to a property settlement, people still are not counting superannuation in it. They see the house, they see the car, they see those things, but they don’t see the super. They forget about the super, which could be, as Brett said, the most significant thing that they have, so it’s just getting the information out there, getting the knowledge out there.
Heather McKinnon: Yeah and that control thing. Like I just did a mediation on Friday where there was a super pool in the husband’s control of $600,000 and the wife had $140,000. We’ve been in litigation for a year. And he was still railing with the court appointed mediator, “Why does she get that?” You know, in this day and age, you would think most people understand it’s a form of savings. But, every time we hit that wall and we’ve got a long way to go.
Benjamin Bryant: The second question we have for you Brett is: When couples do decide to separate, dividing the assets is often the biggest flashpoint. As lawyers, we always recommend that people do a full audit of the assets before they even start talking about who gets what. Brett do you have any suggestions on how best to audit and value the shared asset pool?
Brett Martin: To my mind, the audit of the assets is purely a numbers exercise. And you can put it down on paper pretty easily. However, when it comes to valuing what those shared assets are, that’s a completely different exercise, the way I see it. If you’re 55 and perhaps you earn a lower wage, then your ability to recover from divorce is going to be a lot more limited than someone who is earning a good income and can recover. So, for that person, something like the house and a roof over their head, especially if they’ve got kids, that’s going to have a far higher value than some super asset that they can’t touch for another 10, 20 years. I think we can all recognise that purely from a financial aspect, divorce can be quite devastating for women because, again, quite often they’ve been the homemaker, they’ve got the kids. So, all they’re really probably looking for is that roof over their head, that security. So they’re going to place different value on different assets.
Heather McKinnon: And it’s certainly a very complex task to look at when you’ve got the assets there and you’ve got the valuers in – what’s the best way for me to get my money out to protect my future? And again in mediation we often see that tussle between people who are emotionally attached to an asset versus a partner who is more rational and can make financial decisions without being emotionally attached. So that’s where your job comes in, trying to lift that emotional deficit that some people have off the table and just logically look at what’s the best outcome for you. How do you go about that Brett? Like when you see a client for the first time, what information do you need to get from them to help you help them?
Brett Martin: It is challenging and a lot of my role becomes around the emotional side of where they’re coming from. So you’re trying to go very deep to say, “OK, it’s fine that you want the house, or you want the super or whatever it is. But why? What is it really that’s causing you to think that way? What are the underlying problems or insecurities that you’ve got that are pushing you down that way? Because until you can get deeper you’re not going to be able to understand them and then be able to help them.
Benjamin Bryant: There seems like there’s a synergy between our roles, because that’s exactly what we do.
Heather McKinnon: Yeah, and I suppose Brett too, one of the things you’ve got to do is assess capacity to take on risk, because obviously, as you’re saying, psychologically, some people are not up for risk. They might not be confident enough to borrow against a house and take more super because they’re worried they won’t have employment as they get older. So it all becomes tricky, doesn’t it? With looking at, what someone’s prepared to punt in terms of their future.
Brett Martin: Absolutely. again, if you go deep enough, you’re looking at it even as far as to say, “OK, what’s out there in the future?” You know, if you’re 50 years old, chances are you’ve probably got parents who were in their 80s. So do you have that ability to recover because you know that something maybe in the next 10 or 15 years might be coming your way, to pick you back up to where you would have otherwise been. And the stats show that men are more likely to remarry again. And it doesn’t often take them long. And women are probably more likely not to remarry. Once bitten, twice shy.
Heather McKinnon: Yeah, yeah. And as we know from media reports, the big crisis we’re facing are women over 55 at homelessness. It’s becoming a massive issue. And as you said, often these women divorced in the late 30s, early 40s, raised the kids. They’ve not been able to get a good foot into equity. And now they’re faced with the fact that they’re not going to. And so we’re going to have to come up with some government policy shortly because there’s a whole cohort of those women that are hitting retirement with no housing.
Brett Martin: Again, with the remarrying, there’s not that joint coming together of an asset pool for a second time. And that’s where obviously your role comes in because of the estate planning and making sure that things are tight in that regard with blended families. But for those that don’t remarry and are trying to do it on their own, it’s tough.
Benjamin Bryant: Well Brett, we also know that relationships don’t just accumulate joint assets. They also accumulate joint debts. If disputes result in non-payment of mortgages or debts, then your credit rating is at risk. Heather and Brett, I’d like to hear from you both about how people can protect their credit rating through the separation process.
Heather McKinnon: Well the classic facts scenario in Australia is that we know that the initiator of the separation is more likely to be a woman rather than the man and the woman leaves the house. So the problem then is that the man who is in control of the house and the mortgage may decide to set up a battlefield and stop making repayments. The woman then has to go to court and there’s lengthy delays and she’s trying to protect the credit rating, tell the bank what’s happening. So we’ve got to have strategies in place. Certainly, judges are well aware of the use of the big stick of “I’m going to wreck your credit rating and take you down with me”. So they will do emergency orders to try and protect the credit rating position while the court determines the overall settlement. But by and large, my main advice to clients and Brett will talk about it, is if you become under financial stress at separation, keep your bank in the loop, go and see your local branch, explain what’s happened, see what hardship provisions are available. Make sure you let the bank know that you’ve started court proceedings and keep updating them. My experience is, as long as they know that you’re doing that, they will do everything to make sure that your credit rating, in terms of your capacity to borrow at the end of the settlement, is okay.
Heather McKinnon: But if the bank starts to get narky, you really need to apply to the court for urgent orders. Otherwise you will find yourself in a position where you can’t borrow. So we have methods to try and address it. But as Brett said, a lot of people, when you first see them, aren’t even aware what legal liability they have on credit cards, personal loans, equipment leases, car hire purchase agreements, and they look at you blankly. And I’ll say, do you remember signing anything? “Oh I might have?” And they have no idea what they’ve borrowed in the relationship. There’s a report this morning of criminal charges that were concluded yesterday in the local court here, where a woman was the director of the company and signed whatever was put in front of her. In the meantime, the other director, who was her ex-husband, had been committing massive financial fraud. So you can get yourself into a lot of problems and we call it in the industry, sexually transmitted debt. You can’t take your eye off the ball. You have to, as an individual, at all times in your life, understand financially where you’re up to. Brett, you would have seen a lot of disaster stories.
Brett Martin: And to be honest, usually I see it at the end. I don’t see it as an ongoing thing, but someone would come in to me and say, oh, this is where I’m at today, and you’re trying to fix it after it’s broken, which is impossible. Interestingly, this is a little bit off-topic, under our code of ethics, ridiculously, we are being told now, if we have two clients that are divorcing, we can no longer act. We can’t be involved lest there be a conflict of interest, which is quite crazy when you think about it, because we do get quite close to our clients and then in a time of need, and even if everyone’s playing nicely, we actually have to separate ourselves and say, well, I can’t actually get involved.
Benjamin Bryant: And you might be the only one that knows what’s going on.
Brett Martin: At times. And I’m in that process at the moment with a younger couple who are going through a divorce. And it started well, nicely. Everyone was talking. And now it’s gone quite ugly, as you must see all the time. Everyone’s got the best intentions, but the reality is it doesn’t end that way. But again, I’m having to remove myself from the conversations. And it’s really hard when they’re asking me questions. And again, I have to step away.
Heather McKinnon: So I’m assuming in your industry, it’s like it happens all the time for chartered accountants who have acted for a couple for years. You will set up referrals with other financial planners you trust. You’ll send your clients off to those people and similarly you’ll get referrals where there’s conflict.
Brett Martin: Possibly. Yes, yeah. It’s very new, these rules. So they’re yet to be tested as such.
Heather McKinnon: It is a very tricky time. And like you said, I know chartered accountants find it very distressing because they have to say we can’t act for either of you. And they may have had a 30-year relationship with the business and the clients.
Brett Martin: And sometimes you need that knowledge that that’s really critical to help those clients.
Heather McKinnon: And it’s like Ben was saying, that control issue. Because that’s why these legislation changes are coming in, because the study of control shows that it’s complex.
Benjamin Bryant: And Brett can I just ask quickly, how can someone check that credit rating?
Brett Martin: There is obviously credit rating agencies that they can call it’s probably not an area we deal with as planners so much as accountants would do in that area.
Benjamin Bryant: Ok. And Brett, we were talking before about superannuation and the myth that it doesn’t form part of the property pool, but of course it does. So I’d like to ask a few questions about super to help our listeners make wise decisions when it comes to divvying up their retirement savings. The first question is, if it’s agreed that one person is going to hand over a share of the superannuation to their ex as part of a settlement, does the money need to stay in a super fund? And what process needs to be followed to stay within Australia’s strict superannuation rules.
Brett Martin: Yes. So the rules around super still need to be obeyed. So those preservation rules, the rules around access. Let’s assume the funds are in what we’ll call the accumulation phase, rather than the drawdown pension phase. Then again, those same rules will apply whether you split that super or not. So the recipient of any super doesn’t get access to those funds for their own personal use unless, again, they can make that condition of release.
Benjamin Bryant: One of the things that we talk to clients about is whether or not they actually want to split super. It is possible to take super into account but leave it untouched, using other assets to compensate. So maybe one person keeps the house and the other person keeps the super. In your experience, are there advantages to keeping your super intact and using other assets to balance the settlement.
Brett Martin: It can be, yes. I would say, again, this would depend on people’s ages at the time that they’re getting this split or divorce. If you’re 55 / 60, then your access to your super is a lot closer than someone who may be 50 / 45. So, looking out, they’re going to be able to see, yes, I’m going to be able to access that super much sooner to put me back perhaps in a position that I once was. So the younger spouse would probably be looking for an asset again, like the house, for that security, whereas the older divorcee could be looking to say, well, I can keep the super, but because I know that I can get that access much quicker,
Heather McKinnon: I was thinking about that, I did one last week where my client had a fast-earning capacity. So even though they were in their late 50s, they could borrow to get into the housing market. So they negotiated to keep the bulk of the super and they were able to negotiate a favourable percentage split because they said, well I’ll take more of the super, because I’m not going to be able to get it for another eight years and give you more of the cash asset. It’s all about, as you said, age, earning capacity and what each person’s ability to rebound is using the different structures. And it can get quite complex as to which way to jump.
Brett Martin: And even in this environment where if you’re 60, you may not be able to access your super as a lump sum, but you can draw upon it as a, what we call, a transition to retirement pension, which means you can potentially start accessing up to 10 per cent of that pool of asset, which can put you back to where you were. And how you value that in a split, would be really interesting.
Heather McKinnon: And that’s where your job comes in because, we need financial planners to be able to model the different scenarios for the client before they go into a negotiation.
Benjamin Bryant: And Brett, we know that self-managed superannuation funds are becoming more and more popular, and in most cases it’s common for partners to be the trustees and the beneficiaries of the self-managed super funds. What happens if one trustee asks you as a financial adviser to make a change to the fund and the other trustee doesn’t agree?
Brett Martin: I just couldn’t act. If the trustees aren’t on the same page, then again, we’ve got that conflict that says an adviser can never act.
Benjamin Bryant: And in terms of the modification of the self-managed super fund after a property settlement, how do the parties wind it up, as it were, or transfer it out? Is that possible?
Brett Martin: It is. Are you saying if a property’s within the fund?
Benjamin Bryant: If you essentially have two people in a self-managed superannuation fund, is it possible to have one person remain in the fund and the other person leave, or is it possible to bring somebody else in or is it possible to wind it up?
Brett Martin: All of the above. So I guess this is.. Especially with a self-managed super fund… If I use the example of myself and my wife, our super fund is completely dominated by the property that we work out of. So that sits inside our fund. Now, if we were to divorce, how do we split that asset? Because we’d have to sell the commercial property, which is just not viable really, because we operate a business out of it. So we would have to come to some sort of agreement to hold that property in the fund, whether we both stay in it. So there would be a lot to work through. And that’s the issue. Ideally, if you have a couple separating, you would have to say it’s in their best interest to break free of each other within the fund itself
Benjamin Bryant: Sever the financial ties..
Brett Martin: But not always in the best interest of both parties, in that scenario where there is a large asset that potentially dominates the fund, because it’s just not practical.
Heather McKinnon: And it really shows the need for financial planners. Like we often get that exact scenario where you might have a medical practice, where the super fund is the medical premises or various businesses. And so invariably one will retain the business and then the landlords the ex. So it’s all about, as you said, what goodwill’s preserved and what options are available for buy out. So it’s a very interesting world once you get into those sorts of complexities.
Benjamin Bryant: And finally, I have one more question for you, and that’s in respect to tax. What are some of the common tax implications that people need to be aware of when determining who’s going to get what?
Brett Martin: Yes. So when it comes to, for example, a self-managed super fund, you can get some rollover CGT relief if you move an asset from one fund to the other. But there will be other circumstances where you can’t get that relief. It gets quite technical. So definitely advice from your accountant or planner would be the way to go there. But also on those other assets that sit outside super, obviously there’s different rules, and this is where I think your job becomes more challenging, is in trying to work out, for example, if it’s their home, obviously there’s no tax there involved on selling on a personal home. But if it’s an investment property, do you take that asset yourself and the inherent gains that sit within it and that really needs to be thought about and accounted for, I would assume, in that split?
Heather McKinnon: Yeah, it’s very complex. I mean, Ben’s just finishing one off with there’s eight or nine properties, and that’s exactly the issue: the capital gains that’s going to crystallise if any of the assets are sold. And what’s the benefit when you’re looking at what profit you’re retaining? So it gets very hard and it’s something that you’ve got to be very careful to get proper advice on. Because in those sorts of cases it can be hundreds of thousands of dollars if you jump the wrong way.
Brett Martin: I would also think, if you’ve got a super asset in an asset that has capital gains, you’ve also got to assess well the super fund has a limited tax structure versus a, not an unlimited outside, but a much higher tax structure as well. And then company tax structure. So it’s all going to be a minefield.
Benjamin Bryant: Yeah, yeah. And that’s why you’ve got to reach out to your local financial planner and your tax accountant. Well, thank you Brett for giving us some wonderful insights into financial planning in some pretty difficult times.
Brett Martin: Thank you, Ben. It’s been a pleasure. I hope I’ve been able to add some value there.
Benjamin Bryant: Absolutely. Thank you Heather.
Heather McKinnon: Pleasure.
Benjamin Bryant: Another fabulous show. It just keeps getting better and better. And next month, we’re going to have what I suspect will be one of our most popular episodes. We’ll be talking about do-it-yourself divorce and asking whether or not you really do need a lawyer. This has to be one of the most common questions that we get asked Heather. And don’t worry, we promise to give you straight answers. This show is about empowering people, not selling our legal services.
Benjamin Bryant: If you have specific questions or stories about do-it-yourself divorce, please feel free to either message us on Facebook or email familymatters@bryantmckinnon.com.au. We’d love to hear from you. I hope you get plenty of value from today’s show. We’ll be back next month. But in the meantime, we have a whole library of great podcasts available for your listening pleasure. Goodbye for now.