Can I have a piece of the pie now? - Partial property settlements in family law matters
When going through a separation, it is important that you and your former spouse formalise a final property settlement and take the necessary steps to ensure that your financial ties to each other are cut. However, the process of negotiating and ideally reaching an agreement for a property settlement, making it binding and then implementing the agreement can often take some time.
Sometimes a situation arises where one party has greater access to funds or financial resources than the other, who may be struggling financially to meet their living expenses, outgoings and legal fees to continue the negotiations. In these circumstances, this party may seek a partial property settlement, in advance of the final settlement being reached. A partial property settlement usually involves a distribution of assets (usually funds) between the parties and is often in the form of a lump sum payment from bank accounts or from proceeds of sale of a real property. The purpose of a partial property settlement is usually to counteract any interim inequity in financial positions of the parties.
Partial property settlements are most common in situations where the former family home, or another asset has been sold and there are sale proceeds available prior to the final settlement being reached. Family lawyers will generally recommend that these funds be held on trust on behalf of the parties by a lawyer or conveyancer pending a final settlement being reached. However, the parties can agree to a distribution of part or all of those funds to either or to both parties as the final settlement continues to be negotiated.
Partial property settlements can therefore be sought during the negotiations process and if so, they generally only be made by agreement between the parties either directly or with the assistance of lawyers. Partial property settlements can also be ordered by the Court in litigated family law property matters.
So, is a partial property settlement free money?
Partial property settlements are accounted for as a distribution made in a party’s favour, when negotiating and finalising the overall family law final property settlement. If the parties received an equal partial property settlement, then these will effectively cancel each other out.
However, if only one party received a partial property settlement, or where the distribution between the parties was not equal, the distributions will be acknowledged and notionally added back into the asset pool available for division in the final settlement and treated as funds which have already been received by the party. The practical effect of this is that the partial property settlement is deducted from the amount that party would have otherwise received from the final settlement, had the interim distribution not occurred.
Because of the requirement to ‘add-back’ any partial property settlements to the assets available in the overall property division, it is recommended that any distributions are not so significant that it could consequentially cause issues or require formal repayment in the final property settlement. It is also important to note that if funds from a partial property settlement are spent or applied to purchase an asset, the distribution is still added-back into the pool at either the original amount, or the improved value, but it is not to be double counted.
Example Scenario 1:
You and your former spouse have separated and are in the process of negotiating your family law property settlement. You decide to sell the former family home. Once the mortgage and all associated costs and expenses for the sale are paid out, there is $500,000 in net sale proceeds remaining. You agree to divide these proceeds in half, and each take $250,000 by way of partial property settlement.
As you continue to negotiate your final property settlement, relations turn sour, and you engage legal representation to assist you. Based on the advice received, the overall settlement should be in your favour and some of the net sale proceeds need to be repaid from your former spouse to give effect a just and equitable settlement. Possibly, your former spouse has now spent those funds and cannot return any portion in cash.
If the sale proceeds had been held on trust on yours and your former spouse’s behalf when the home was sold, and a smaller partial property settlement distributed between you and your former spouse, this issue of repayment would not have arisen.
Example Scenario 2:
You and your former spouse have separated and are in the process of negotiating your family law property settlement. Your former spouse is employed full-time in a high salary job. You are employed on a part-time basis as you are the primary care giver for your children, and you earn a modest income. You and your former spouse have sold your jointly owned investment property and the net sale proceeds are being held on trust on behalf of you both by a lawyer. You are having trouble meeting your everyday living expenses and bills, so you request a partial property settlement of $20,000. Your former spouse is agreeable, but they also seek a distribution of $20,000. You agree.
Over the course of your negotiations for the next few months, you spend your partial property settlement funds on genuine living expenses. Your former spouse invested their funds in shares which have increased in value to $30,000.
In the final property settlement negotiations, your partial property settlement of $20,000 is likely ‘added back’ into the property pool available for distribution, despite the fact you have already received and spent these funds on genuine expenses. In effect, $20,000 will be deducted from your overall distribution in the settlement as you have already received these funds.
Your former spouse will likely have their new asset of $30,000 in shares added into the property pool available for distribution and deducted from their overall distribution in the settlement. This is because the value of assets and liabilities in the property pool is as at the date of the final property settlement occurring , not at the date of separation (click here for more information about the date that assets are valued in family law property settlements).
What if my former spouse won’t agree?
If there is no agreement between the parties for a partial property settlement, then depending on financial circumstances, one party may be left with no option but to make an application in the Federal Circuit and Family Court of Australia. The Court has powers under the Family Law Act 1975 (Cth) to make orders for a partial property settlement. In doing so, the Court will usually consider the following factors:
If there is a source of finance for the payment;
Whether one of the parties has the majority control of assets or is in a greater financial position;
If the payment is likely less than what the party seeking it would ultimately receive from the final property settlement;
Whether there is a reasonable explanation as to why the funds are required and to what expenses they will be applied; and
If it is ‘just and equitable’ for the Court to make the partial property settlement.
However, in most circumstances, the Court will not necessarily easily order partial property settlements and will likely proceed with caution in making a decision. This is because this type of application will take place before all of the relevant evidence in the family law matter is presented to and tested by the Court. Therefore, the Court will only proceed with making the order if it is absolutely satisfied as to the appropriateness of same, based upon the above factors.
We recommend seeking independent legal advice from a family lawyer before agreeing to a partial property settlement with your former spouse. Our Family Law team can provide advice on appropriate distributions and progressing your negotiations forward to reaching a final property settlement.
Tara Paatsch
Principal Lawyer
M 0412 660 842 | T 03 5225 5254
E tpaatsch@ha.legal
Natasha Vassallo
Lawyer
T 03 5225 5237
E nvassallo@ha.legal
