Pierce Carstensen, principal at McInnes Wilson Lawyers discusses how to best protect yourself in a relationship, knowing when you are at risk and what you can do about it.

The most important financial decision you ever make is “who do I cohabitate with”. There are very few other choices you make which may cost you half of your net wealth if you get it wrong.

Everyone has heard stories about nightmare divorces and horrible separations. To best protect yourself you need to know when you are at risk and what you can do about it.

When am I at risk?

You are at risk of losing a portion or your net wealth if you separate from your partner whether you are in a de facto relationship or a marriage. It is obvious whether you are married or not, but the question of whether you are in a de facto relationship is more complex.

A de facto relationship is a relationship between two people of either the opposite or same sex, who have had a relationship as a couple, living together on a genuine domestic basis.

The existence of a de facto relationship entitles the parties to exactly the same rights and entitlements that married couples enjoy when they separate. There is no difference between a marriage or a de facto relationship under the Family Law Act 1975 (Cth).

When does a de facto relationship exist?

The Court typically looks at the following points when determining whether a de facto relationship exists:

1. length of the relationship;
2. whether the parties share a sexual relationship;
3. the ownership use and acquisition of property;
4. care and support of children (if relevant);
5. reputation and public aspects of the relationship;
6. degree of financial dependence and support; and
7. the mutual commitment to a ‘shared life’.

Not all these indicators must be present for a de facto relationship to exist, and it is not a mathematical exercise. If 4 indicators are present and 3 are not it does not necessarily follow that the relationship is a de facto relationship. Rather, the Court (or the professional advisor) would need to use their discretion to determine whether the relationship is a de facto relationship or not.

For example, if:

1. the relationship was more than 2 years;
2. there was a sexual relationship; and
3. a degree of financial dependence and support,

a de facto relationship might not exist without the mutual commitment to a shared life.

How do I know when a relationship is a de facto relationship?

There is no absolute evidence of a de facto relationship. Good evidence includes:

1. Joint ownership of assets;
2. Care and support of a child or children;
3. Being Facebook official (reputational aspect);
4. Joint utility bills (financial interdependence);
5. Being included in extended family photographs (reputational aspects);
6. Attending extended family holidays and events (mutual commitment to a shared life); and
7. Joint bank accounts or loans (financial interdependence and mutual commitment to a shared life).

So, do I still own my property during the relationship and after it has broken down?

In the event a de facto relationship breaks down, if the non-property owning spouse has contributed financially and/or physically to the property (or in some cases, non-financially), they are potentially able to claim an interest in a percentage of that property in a property settlement.

That applies even if one party owned the title prior to the start of the relationship (providing the other party made some contribution to the property, the parties’ other expenses or the family during the relationship).

Common sense does apply here; if you purchase a million-dollar property and your de facto spouse of two years mows the lawn for 6 months prior to separation, that contribution will be so insignificant in the context of the value of the property and the length and nature of the relationship that they are unlikely to be entitled to any percentage of the value of that property.

What if my partner and I purchase property together, or separately in our own names, during the relationship?

Property purchased during the relationship will generally form part of the property pool for the purposes of property division.

That does not mean that it will be divided equally; if you have contributed a greater share of the purchase price and the various costs since the purchase of the property, you may be awarded a greater share of the property.

This recognition is not normally a dollar-for-dollar recognition, and the contributions you make early in the relationship will receive progressively less weight the longer the relationship lasts. This is often referred to as the “erosion principle.”

For example, compare the following scenarios:

1. You use your cash savings accumulated prior to the relationship as a deposit on the property and you separate within a couple of years; and
2. You use your cash savings accumulated prior to the relationship as a deposit on the property and you separate 14 years or more after the purchase of the house.

Your contribution to the purchase of the house in the first scenario would receive more weight and result in a larger adjustment in your favour than in the second scenario.

What if I have children from the de facto relationship?

The same principles apply for determining parenting arrangements for the children of a de facto relationship as the children of a married couple.

Children of de facto couples have a right to know and have a meaningful relationship with both their parents.

Similarly, the parents of the children are assessed to pay child support in the same way as married parents are.

How do I dispute that a relationship is a de facto relationship?

It can sometimes be difficult to prove that a de facto relationship existed.

There are obvious reasons why someone will want to prove the existence of a de facto relationship, and that it would give both parties a right to a property settlement. Conversely a party that has legal ownership over assets and would potentially have that ownership diluted if a de facto relationship was recognised, will have an interest in denying the existence of that relationship (saying instead that they were simply friends).

To prove the existence of a de facto relationship one would have to apply to the Federal Circuit Court or the Family Court to have a declaration made that a de facto relationship existed. To apply to the Court or defend an application is a time consuming and costly process.

How do I avoid giving a partner an entitlement to my assets?

If you are found to be in a de facto relationship it usually follows that your spouse will have some entitlement to your assets. However, in some cases, the Court may find that a de facto relationship exists, but it is not just and equitable for there to be any Orders (giving them a share in your property) made.

The only way to have the best chance of avoiding that is to specifically quarantine those assets in a Binding Financial Agreement.

Binding Financial Agreements can be done during all stages of a relationship, including prior to a de facto relationship starting (i.e., when you are still just friends), during a de facto relationship, or before, during or after a marriage ends.

What is a Binding Financial Agreement?

A Binding Financial Agreement (BFA) is an agreement that states how two peoples’ property will be divided if they separate. This allows you to have the best chance of protecting your assets if your relationship breaks down.

BFAs are commonly used to protect assets. Examples include:

1. protecting assets that were brought into a relationship from a future potential relationship breakdown;
2. protecting any future inheritance, you might receive from a future potential relationship breakdown;
3. protecting a personal injury payout or other compensation payout in the event of a future relationship breakdown; and
4. ensuring loans from family members are repaid at the time of a future property settlement, instead of that money being claimed by your spouse in any future property settlement.