Many people make a promise to share a life together – for richer or poorer. But all too often a good relationship can be pulled apart by money issues resulting from different views on how to handle money, different expectations or poor planning. Before making the leap to move in together, couples should agree on how to organise finances. Some decisions may be based on lifestyle choices while others may be based on their views about money.
Planning finances
Encourage clients to plan finances as a couple, particularly if they are older and each partner has already accumulated their own wealth and has their own family.
There is no right or wrong way to arrange finances, but it won’t work unless it is a joint agreement. Clients could open joint bank accounts or keep finances separate, with a plan for how to share common expenses.
The decision might be influenced by: lifestyle and financial goals; the impact on goals if one person is not as financially comfortable; or concerns about protecting inheritances for children from previous relationships.
Even if couples pool resources, it is important to maintain some independence. Each person should always have access to some money in their name to cover unexpected events.
| Defining a couple Two people living together are considered to be a couple if they are partners in a relationship. When making this assessment, Centrelink may take into consideration: the financial aspects the nature of the household the social aspects of the relationship any sexual relationship, and the nature of the commitment to each other. Couples can be legally married or living in a de-facto relationship. This includes same-sex partners. |
Centrelink entitlements
If clients are living as a couple, eligibility for Centrelink or Veterans’ Affairs (DVA) benefits is based on combined assets and income. Couples may agree to keep assets separate, but Centrelink and DVA won’t see it this way.
This may create financial difficulties for a partner who has fewer resources, unless some sharing of finances is considered.
His home or her home A home can be one of the most tax-effective investments, due to capital gains tax (CGT) exemptions. But the exemption can only be claimed on one home (purchased from September 20, 1985).
For couples, this means only one home between the two of them. If each partner owns a home, they may need to decide whose home will continue to be tax-free. Alternatively, they could choose to share the exemption so that half the growth on each house is tax-free – but this may affect tax concessions if they decide to rent out one of the houses.
Clients who are buying a home together should decide whether to buy it as joint tenants or tenants in common. This will impact estate planning options.
| Example Harry and Beth recently married and moved into Harry’s home. Beth has decided to keep her home and rent it out. They elect to nominate Harry’s home as the main residence, so it keeps the CGT exemption. He will not pay any tax if he sells his house in the future. Beth should get a valuation on her home, as the future growth is subject to CGT. However, Beth’s home will now be an investment property and she may be able to claim tax deductions for the expenses (including interest on any outstanding mortgage). |
Debt management
Relationships require trust and honesty, but it is also important for both partners to keep an eye on joint financial arrangements, especially where debts are concerned. If debts are in joint names, each person can be held liable for the full debt, not just half of the debt.
| Example Carol’s marriage recently broke down. They had a mortgage on the home and her husband had borrowed money for his business. The business loan was in his name but was secured against the home, which was in joint names, so Carol signed as guarantor. After selling the home and all other assets they still owed $100,000. Carol was forced to declare bankruptcy. Her bankruptcy period is due to end soon. She is faced with the challenge of re-establishing her life at the age of 45 but will find it difficult to borrow again with her credit history. Luckily Carol has a good job and still has her superannuation, as it was protected from bankruptcy. |
Estate planning
What would happen if one person passed away? Would the other person be financially secure? Would he/she be able to stay in the home? With second or subsequent relationships, estate planning may need to balance how to look after each other against the inheritance interests of children. This is likely to require more than a simple Will that passes on all assets to the surviving partner.
The start of a new relationship is also a good time to review the death benefit nominations on insurance policies and superannuation accounts, as well as the Will.
| Example Ed and Hanna have been married for 15 years and live in a house that Ed owned prior to their marriage. They both have children from previous marriages and have agreed to leave assets to their respective children upon their death. This means Ed plans to leave his home to his son Phil. If Ed passes away first, this may leave Hanna at the mercy of her stepson, who may want her to move out of the home. One option is to leave the home to Phil, but with a life interest for Hanna so that she can live in the home for as long as she wishes. |
When talking to clients you might also want to discuss the implications of making a binding financial agreement, so they have a plan for how to divide assets if the marriage does break down.
Divorce and money…now that’s a whole other set of complications.
