Disposing of assets before divorce is something that often comes up in discussions with our clients about a property settlement after separation. Here’s a brief explainer on selling assets before a property settlement and what you can do if it becomes an issue in your property settlement process.
A property settlement involves the fair division of the matrimonial (or de facto) pool of assets. And yet a common concern is the possibility of one spouse trying to diminish the asset pool so that their former partner has less to gain in the property settlement.
Typical ways that assets might be scooped out of the shared asset pool prior to a property settlement include selling them, transferring or assigning rights to others (including to trusts or companies), or gifting them away, such as to adult children or friends and relatives. With “gifted” assets, sometimes the plan is that they will be returned at some future time, after the property settlement has been finalised. Or sometimes, debts are simply forgiven, or property is deliberately sold at under market value.
But the restructuring of financial affairs in an attempt to quarantine assets from a claim by a spouse is a dangerous game. That’s because transactions intended to remove assets from the reach of a spouse can be challenged and overturned in court.
Whether it’s a house, shares, a valuable artwork, cash, crypto – essentially anything of value – there are laws that protect spouses against asset disposal designed to deny them their rightful entitlement to a share of the asset pool.
While it’s therefore generally a mistake to dispose of assets if separation is on the cards, this doesn’t mean that separated spouses are barred from selling an asset before a property settlement in all cases. After all, you might have a perfectly legitimate reason to make a genuine sale, such as to repay debt or improve liquidity. If this is your situation, read on as we have some tips below.
What courts have power to do about spouses selling assets before a property settlement
The courts will look at how assets were acquired and the contributions by each party to the accumulation of assets. They will also determine whether a third party receiving an asset is a bona fide purchaser who is truly independent of the transferring party. If the transferee is a company or trust, the courts can examine the company’s structure to see who has control over the entity.
Spouses can’t simply give assets away. The courts can treat an unprofitable transaction as deliberate, reckless or negligent “wastage” and may well exercise discretion in splitting the property in favour of the party not responsible for the disposal of the asset.
Spouses also cannot sell assets for much less than they are worth, to try to reduce the marital asset pool. Assets that are sold on less than commercial terms can also be dealt with as wastage, or the courts can issue freezing injunctions to stop the asset being disposed of or its value being deliberately diminished in an uncommercial transaction.
Courts can also add-back the value of the disposed asset into the pool during property settlement and treat it as an asset retained by the spouse that disposed of the asset (so that they wear the loss that they created).
Further, the courts have power to order the return of funds or void a transfer/sale of an asset. Setting aside a transaction made to defeat an existing or anticipated order in family law proceedings can be successful even if transactions were made long before separation, if the court is satisfied that the transaction was designed to defeat court orders for property settlement. There is less focus on the time that has lapsed between the transaction and separation, and more focus on the state of the parties’ relationship at the time of the transfer of assets.
If you are worried about your spouse disposing of assets
Since prevention is always better than cure in these circumstances, we recommend you take early action upon separation to prevent your ex disposing of assets, rather than have to try to claw them back later on.
We always recommend that you sort your property settlement out promptly after you separate.
If your spouse is encouraging you to jointly dispose of assets, make sure you fully understand the implications of any transactions, ideally with the input of a lawyer.
It’s a good move to see a family lawyer about having a letter drafted to your ex that puts your ex on notice that they may not dispose of assets before you reach agreement in your matter or without your consent.
It’s also wise to ensure joint signatures are required on your mortgage and on any joint bank or credit card accounts.
You might also consider putting a caveat on property that may be in your ex’s sole name, if there is a risk that they may try to sell it.
Another good suggestion is to watch the real estate market to ensure your ex-partner isn’t selling property in their sole name.
If necessary, start court proceedings to seek an injunction that restrains your ex from asset disposal.
If assets have been disposed of already, ensure you seek advice from a lawyer on your avenues for action, depending on your unique circumstances. This may include obtaining an order to set the relevant transactions aside and return the asset to the marital asset pool, or obtaining a notional addback in your property settlement, or an adjustment of the pool in your favour to account for wastage.
When it comes to your property settlement, make sure you can demonstrate to the court your contributions to the accumulation of marital assets.
If you are the one considering selling assets before a property settlement
You aren’t prevented from selling assets before a property settlement–provided you account for what happens to the proceeds of the sale, so that can be incorporated into the balance sheet. For instance, if you sell an asset for a fair and genuine price and the proceeds of the sale are placed in a joint bank account that can’t be cleared out by one party, then there is no problem because your asset’s value is still available to be fairly divided. On the other hand, selling an asset for cash or moving proceeds of a sale into an offshore bank account or an account in a third party’s name will be problematic.
If you are selling an asset together with your ex, then ensure they are included as much as possible in the transaction and that you can demonstrate you have their full consent to do so.
Remember that spouses must provide full and frank disclosure to each other regarding finances during a property settlement, including disclosure of any transactions disposing of assets or interests.
If you undertake any restructuring of your finances or selling assets, make sure it is done on commercial terms and for a demonstrably legitimate reason.
Never try to dispose of assets in an attempt to defeat a property claim. Not only will it likely not work, but it will also affect your overall credibility in the eyes of the court, which can have serious ramifications.
It may be wiser to hold off on transactions, since you will need to convince a court that you haven’t acted to defeat a property settlement claim. Transactions can cause you to incur more legal fees while your lawyer investigates your asset transfers and obtains evidence of them being legit, including potentially having to involve third parties. It can drag out the divorce and settlement process longer when parties challenge transactions and you need to prove legitimacy.
Ultimately, the best move if you are considering selling an asset before a property settlement is to see a lawyer to get advice.
If you need any legal advice in relation to a property settlement, please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Family Law on (02) 6223 2400.
Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Family Law.
Read information from the FCFCOA regarding property settlements.