Precautions for Your Clients: How to Protect Assets From de Facto Relationships

You may find yourself with a client who is currently single, or perhaps has recently gone through a separation or divorce. As their professional advisor, you are someone who has their best interests in mind, now and into their future. Even if clients are not in a de facto relationship, you have the ability to bring them up to speed about how a relationship may inadvertently be considered a de facto relationship and present as a financial risk.

When Does A Relationship Become A De Facto Relationship?

Generally speaking, a de facto relationship is between two people who have been living together on what is known as ‘a genuine domestic basis’, for a period of at least two years. 

When we look at a genuine domestic basis, there is a range of factors taken into account, such as:

• the duration of the relationship
• the nature and extent of any common residence
• whether there was a sexual relationship
• whether they have a child together
• degree of financial dependence or interdependence 
• arrangements for financial support
• ownership and acquisition of assets

What these factors are looking to establish is the degree of mutual commitment.

If a couple has been living together for less than two years but has a child together, they are considered to be in a de facto relationship. There have been instances where a couple has not been living together, however, Courts in Australia have determined that there was a genuine domestic basis to the relationship. 

Even with this information, de facto relationships can be hard to define. If it is determined that your client is in a de facto relationship then, in the event the relationship ends, a property settlement will be required.

When Can A De Facto Claim On Property?

If a relationship is considered by a Court to be a de facto relationship, then a property settlement, either to formalise that they retain their own assets or provide for a division of their combined asset pool, is required. 

So, as their trusted advisor, you can see the risks that are present.

As you are likely to be aware, in the legal sense property does not just mean real estate. It also includes other assets such as cash, investments, cars, boats, timeshares and shares, to name a few. 

Disagreement About De Facto Status 

As family lawyers we see, quite often, that because a de facto relationship is unlike a marriage with clear dates for when the union occurred, there is no clear and agreeable date for when a relationship began. Some people might view it as when they moved in together, but a de facto relationship does not always mean a couple lives together. In fact, it has become increasingly common for people to be in long term relationships but not cohabitate.

It is also not unusual for one person to say there was a de facto relationship and the other to say that there was not. Some people might have more casual relationships, and perhaps even be in several relationships at once. De facto relationships may not be monogamous like marriage. Although, we do come across de facto relationships while someone is married as well. 

So in reality, this information may even be worth mentioning to clients who are married so that they know that if they are in a longer-term extramarital affair, depending on the financial arrangements which may exist, that may also pose a risk to them and their assets.

How To Protect Assets From De Facto Relationships or New Partners

Being an accountant or financial planner, you are often the closest person to someone’s finances. Which makes it also common for you to be the first to know about changes in your client’s personal relationships. If you have a client with considerable financial assets worth protecting, recommend they seek legal advice from a family lawyer about their circumstances.

A Binding Financial Agreement (BFA) is often the most effective approach. A BFA takes into account what each person brings into the relationship, their contributions during the relationship and other conditions that would come into effect, for example, such as the birth of any children. Both your client and their partner each seek independent legal advice, ultimately coming to an agreement about how they will divide their assets, in the event the relationship were to come to an end. 

Having a well-drafted BFA provides a ‘certainty of outcome’. That is, there will be a clear path to follow to bring a conclusion to the financial component of the relationship. Without this, the outcome of the property settlement is uncertain and, if in dispute, can take years and considerable funds to finalise the following separation, at a time when emotions are heightened. 

Having conversations early with your client about matters like this is an extension of your existing relationship.

Alternatively, if you or your client do not feel that a BFA is the right course of action, what they can do is compile lists of assets and liabilities at the very start of the relationship. Then, your client and their partner may deliberately not combine finances, have a joint bank account, or joint ownership in any property. Encourage your client to keep their own separate income, debts and liabilities. 

Essentially, keeping finances very separate is recommended. However, this is not always easy. Because they may be living together, not intertwining elements can be very difficult to maintain. That is because they would have to not have the other person contribute to the rent of a home they own, or not contribute to the rent if they are renting together.

As a family lawyer, we recommend a BFA as the best chance to protect assets owned before entering into a new relationship. They really are the best path to reduce stress, time, uncertainty and cost issues when a de facto relationship breaks down. 

Of course, as a finance professional, you cannot make someone do that if they do not wish to. So, referring them to seek legal advice can be a good way to ensure you can maintain a great working relationship with your client, so they are assisted to undertake a cost-benefit analysis of the potential risks involved for them and make an informed decision. 

A BFA can be set up at the start of a relationship or during the relationship. So even if your client has identified down the track they have been in a de facto relationship, it is not too late to take steps to protect themselves. 

While these agreements can go a long way in protecting assets, they need to be updated when circumstances change, such as if children are born, or there are significant changes to assets which are not envisaged at the time of the agreement. . 

As an accountant or advisor, you are always looking to protect the financial interests of your clients. Educating them about the extra levels of protection that may be beneficial for them, and where appropriate, encouraging them to have an initial conversation with a family lawyer, can go a long way in value-adding what you already provide.

You will know which of your clients this type of discussion would be beneficial for. If you are not sure how to approach a topic like this, consider mentioning it as part of a broader asset protection discussion. It is often the case that people are unaware that their relationship could be considered a de facto relationship. Making clients aware of the potential risk is the first guiding step.