Add Backs in Family Law
Maximising the pool of assets
When required to determine how the assets will be divided when two people in a marriage or defacto relationship separate, the court uses the following process:
- What are the assets available for division?
- How did the parties contribute, both financially and non financially, to acquiring, improving, and conserving the assets?
- What are each party’s current circumstances and future needs?
- Is the result just and equitable?
Usually, the main scope for dispute arises in steps two and three where parties dispute how they contributed to the assets or the weight that should be given to their current circumstances and future needs. Frequently, the significance of the first step of this process is overlooked.
There is rarely a difficulty in attributing a value to liquid assets such as bank accounts and share portfolios – the value given to such assets is the realisable cash value of the asset. Tangible assets such as houses, land, cars, and chattels are taken at their sale or second hand (not insured) value, and often need to be valued particularly where neither party knows the value of the assets or there is a dispute.
Obviously, the more assets there are to be divided, the greater value of assets that a party will receive in the eventual settlement. A number of techniques can be employed to maximise (or, in other circumstances, minimise) the value of the asset pool to achieve a more favourable result. The emergence of trusts, superannuation and structured asset holdings has been considered by courts in determining what property is available for division.
One contentious point relates to monies that were in existence at separation that have been spent by one of the parties, for that party’s benefit, since the time the parties separated. The generally established rule is that those assets should be notionally added back to the pool (dubbed an ‘add back’) and considered an asset that the party receiving the benefit had already received.
There are three main categories of addbacks :
Legal Fees – the Family Law Act says each party should pay their own legal costs. If a party uses joint funds to pay their legal fees, then there is a strong case for those funds to be considered already received by the expending party in the property division. Adducing evidence about legal fees and the source of funds used to pay the legal fees can often result in the other party’s legal fees being ‘added back’ to the pool;
Waste – Where a party has intentionally acted to reduce the asset pool available for division, or acted recklessly or negligently and thereby caused a reduction in the asset pool, the wasted monies can be considered in determining the outcome; and
Spending Monies/Disposing of Asset – If one party spends monies existing at separation, or disposes of and receives money for an asset that existed at separation (thereby depleting the asset pool), the value of the asset or monies as at separation can be added back to that party.
Clients must be careful about their conduct with money post separation but pre settlement. Previous cases have penalised clients for gambling, offering the use of an asset to a third party for no charge or below market charge, or ill advised business ventures. Even the purchase of reasonable assets that are likely to decline in value (such as boats, vehicles, or in one case, $1.8million worth of wine) can result in a financial penalty to one party.
Taking a great amount of care to consider the asset pool at separation as contrasted to the asset pool at the date of settlement or hearing can result in a more favourable outcome for your client.
Adam Bak is a Director at Farrar Gesini Dunn Family & Collaborative Law.