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Reducing the financial risk of divorce

I don’t think anyone would describe the process of going through a divorce as being easy, but often couples limit their discussions to the division of assets, and the parenting arrangements for children.

Unfortunately, the separation itself doesn’t extinguish the ongoing financial obligations of each party to each-other. In fact, expenses will likely increase with the expenditure involved in running two households. To address the increased financial risks involved, any discussions should also include a review of your superannuation nominations, wills and personal insurance. This will ensure that you are both clear on what your financial position would be if the other person were to pass away, or they couldn’t work because of an illness or injury.

Superannuation

Under superannuation law, strict definitions apply around who can, and can’t, be a beneficiary. By law, you need to be separated for at least 12 months before you can officially apply for a divorce. So even though you may have physically separated, a spouse nomination will continue to be valid until divorce occurs. After divorce, you can no longer nominate your ex-spouse. If you still want to nominate each other, an option is a new nomination to your ex-spouse as a financial dependant. Each super fund will have a different process to prove this strict definition. If it can’t be successfully demonstrated at the time of the claim, the trustee will declare the nomination invalid.

A super nomination can include the children. The funds are received tax-free if they are under the age of eighteen, but unfortunately they also take control of the funds at the same age, so are unlikely to make the wisest financial decisions about any lump sum.

Alternatively, a nomination can favour your estate, which means you need a valid will. An ex-spouse is considered a tax-dependant, so any benefit passed through the will should be received tax-free. If a concern exits that the surviving spouse will not act in the best interests of the children, the will could include a testamentary trust, managed by a person of your choice, and limit any access by children until they reach a specified age.

Insurance

Ensuring each of you have sufficient income protection will not only mean your lifestyle can continue, but also make sure that you can each meet your obligations for the children’s joint costs and child support.

Life insurance can be owned inside or outside of super. If you have insurance inside of super, it will generally be dealt with in the same manner as your super balance outlined above.

Life insurance outside of super has some more flexible option for ownership. Traditionally, a life insurance policy is taken out by the life insured (by default, also the owner) with the spouse being nominated as a beneficiary. In this case, the owner can cancel the policy or change the beneficiary at any time.

To remove this risk, an alternative is cross ownership. In this case, Mum owns a policy over the life of Dad, and Dad owns a policy over the life of Mum. Providing they each keep paying the premium, the policy can remain in force as long as they wish.

Wills

Unlike marriage, divorce does not revoke a will.  In South Australia, a divorce will only revoke the clauses providing that your ex-spouse is a beneficiary or executor of your will, so it’s important to check that following divorce, your will still reflects your wishes. You should also consider whether you wish to retain your ex-spouse as your power of attorney if they are nominated.

Conclusion

Eliminating the financial risk during a marriage breakdown can help parents focus on what matter most: rebuilding relationships, and the well-being of any children involved.

There is no single solution, and each family will be different. Receiving timely advice will allow you to understand your needs, avoid many of the issues that can arise, and obtain the right outcome for both of you.

Author
Financial Planner AFP® | M.FF | Authorised Representative No. 401525

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