Behind Closed Doors
Asset magazine, March 2013
If matrimonial issues arise, it’s probably time to visit a lawyer.
As a family lawyer, something which I commonly encounter is the way financial planners can leave their clients, and potentially themselves, exposed when dealing with matrimonial issues. Whether acting for spouses, de facto partners, or their parents or business partners, the best of intentions can so often lead to disastrous results.
Typical examples of when things can come unstuck arise when someone, who may have been a client for years, comes into your office and tells you:
- They are thinking, or actively planning, to leave their spouse or partner;
- They have entered into a new relationship, and want to make sure the new partner does not have a claim to particular assets such as a business or inheritance.
- They want to bring their son or daughter into the family business or farm, but make sure their child’s spouse or partner cannot get their hands on it; or
- They want to gift or loan money or property to their child, but make sure that the child’s spouse or partner does not get it.
You want to do the right thing by your client. And it may seem that reviewing their portfolio, discussing potential options to protect their assets, or making arrangements to set up a trust or loan agreement may be a good starting point. But you could be doing exactly the wrong thing by your client.
Why? Very simply because there’s a real possibility that down the track, the lawyer acting for a disgruntled spouse, partner, or son/daughter in law, will issue a subpoena for any files you have. And we’re not just talking about formal statements of advice. Handwritten diagrams, file notes or other schematics on sheets of paper are all open to scrutiny. If there is any suggestion that your client has tried to transfer or hide assets, or even that transactions were entered into in anticipation of a potential claim, it can work strongly against them, or their son or daughter, in the Family Court.
Advisers often assume that client confidentiality protects them from having to disclose what was discussed at meetings, or their files. This is wrong. The only documents which cannot be viewed by the other side are documents to which legal professional privilege attaches.
There can be disastrous consequences when financial planners offer what is essentially family law advice – not necessarily because the advice is wrong, but because it is not privileged. This applies equally to the advice sought by, and/or given to, either side in a matrimonial dispute.
Legal professional privilege attaches only to communications between the lawyer and their client and any documents created for the dominant purpose of giving instructions or obtaining advice. In the Family Court, the privilege may not even protect communications between clients and, for example, commercial lawyers.
A recent case illustrating this problem involved an older couple with a family business in which their adult son worked. They had two daughters who were not involved in the business. Wishing to grow the business, the son wanted to take on more debt. The family visited their accountant and set up a structure for the business and the business premises to pass to the son. In exchange, they entered into a loan agreement with the son. The purpose of this was to provide for their retirement, ensure their daughters got a fair inheritance, and to protect the business from any matrimonial dispute. The loan was executed properly and a mortgage was registered over the business premises.
During the GFC, the business began to struggle. Relations between the son and his wife became strained and she left him for another man. When the case went to the Family Court, the wife’s lawyers subpoenaed the accountant’s entire file. This included file notes of meetings and a letter of advice which stated that one of the reasons for the loan agreement was to protect against a potential matrimonial dispute.
The grim scenario now faced by the elderly parents and their son is that the ex-wife is seeking to have the loan set aside, to increase the husband and wife’s asset pool, and therefore the amount she should receive. Despite many years of hard work, the parents face losing their retirement fund, their daughters face losing their inheritance, and the son faces a very uncertain future. Even if they are successful in the Family Court, it could take hundreds of thousands of dollars and two years of litigation to do it.
The worst part of the tragedy is that all this had been anticipated and supposedly insured against. Where it all went wrong was the lack of legal professional privilege.
So what should you do when a client begins talking about matrimonial issues? Quite simply: get in touch with a family lawyer, and continue the discussion in the lawyer’s office. There, further discussions are likely to be protected by legal professional privilege.
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