Binding Financial Agreements (colloquially known as “pre-nups”) have historically been used by older people who are entering into second or subsequent relationships and want to protect their wealth. They are becoming increasingly more common among younger people- particularly where one or both parties to a relationship have been gifted or lent money from “the bank of mum and dad” to get into the property market, or are relying on the intergenerational transfer of wealth for their own financial security.
While entering into a Binding Financial Agreement may seem unromantic, you can choose to think of it as you do with other kinds of insurance- the idea is that you hope you don’t ever need it, but if you do you want to be sure it protects you in a difficult time. The process of negotiating a Binding Financial Agreement can also be a positive thing for your relationship!
Binding Financial Agreements can be used by those who are planning to or are married, as well as by those who are or are planning to be in a de facto relationship (including a same-sex or de facto relationship). Legally you might be in a de facto relationship even though you do not necessarily think of your relationship in that way (and sometimes even if you don’t live together!) Once you are in a de facto relationship you can be at risk of a claim against your assets and/or income by your partner if you separate.
Binding Financial Agreements allow you to avoid this risk by providing exactly what will happen to your assets if your relationship breaks down. They can also allow you to exclude or provide for a spousal maintenance (ongoing financial support) claim. They can help avoid conflict, Court proceedings and unnecessary legal fees and ensure that intergenerational wealth and assets are protected. Sounds great, right? Well, yes, they can be, but the reality is that they can also be ineffective if they are not drafted correctly and the terms of the agreement aren’t properly considered prior to signing. There are also strict legal requirements which must be complied with if the agreement is to be effective. There are particular issues for young people because they are less likely than those further down the track to know what their future financial circumstances will look like and to be able to assess at the time they enter into the agreement whether it will actually benefit them.
For this reason young people need to be particularly cautious when considering entering into Binding Financial Agreements. The purpose of this article is to provide you with an outline of some of the things you will need to think about, and some important things to note, if you do choose to enter into a Binding Financial Agreement with your partner. You should reach out to us to get advice that is tailored to your circumstances.
1. Are you planning to have children?
A Binding Financial Agreement is a private contract between you and your partner about the division of your assets and/or spouse maintenance. In entering into it you are effectively “opting out” of the rules that would apply to the division of your assets if you do not have an Agreement.
In cases where there is no Binding Financial Agreement in place, the law requires consideration to be given to things such as care of children, income and income earning capacity if the Court is asked to make a decision about financial matters. Parents who have children in their care following separation are generally entitled to more of the asset pool available for division than they would otherwise receive on account of their “future needs” (i.e. the Court takes into consideration that caring for children is expensive and may compromise your earning capacity and you likely need more of the asset pool to account for this!) They may also be entitled to maintenance from the other partner’s income. An Agreement dividing your assets in a certain way and providing for no maintenance might be entirely suitable to you if you don’t have children, but catastrophic if you end up with three small children in your care full time.
While it is possible to get a Binding Financial Agreement set aside, that will require a Court application and the grounds for setting them aside are strictly limited. The Court will not set an Agreement aside simply because the agreement is unfair, because a long period of time has passed since it was entered into or because the parties are in different financial circumstances than they thought they would be in at the time of entering into the Agreement.
If you are entering into a Binding Financial Agreement it is important that the Agreement factors in what this might look like for you in the event that you have children, even if you aren’t necessarily planning on it anytime soon. Parties need to try and think about what their income and earning capacity might be if they have children primarily in their care post separation, and what this might mean for what the Agreement should provide. Failure to provide for what will happen in the event you have children presents a risk both to a party who is financially disadvantaged by the care of children AND to the party who is not- because it may put the Agreement at risk of being set aside. Agreements should be reviewed from time to time to ensure that they remain suitable.
There are lots of different ways to factor children and care of children into your Binding Financial Agreement and we can be as creative as your circumstances require.
2. What do you own now and what do you expect to own?
As part of entering into a Binding Financial Agreement you will need to disclose to your partner everything that is relevant to your current financial circumstances – including everything that you own and owe at the time of entering into the Agreement.
When providing you with advice about whether or not you should enter into an Agreement, and what you might want it to say, we will also ask you to think about what your future financial circumstances might look like – our advice to someone who is expecting a significant inheritance in the near future is likely to be different than the advice we give to someone who has no prospects of coming into any assets and a low income. But inevitably these things are not always predictable and it is very important that, when considering whether you want a Binding Financial Agreement and what it should provide, you consider all realistic possibilities.
3. What do you want the terms of the Agreement to say, and what would it look like for you if you separated now, and in 5, 10, 15, or 50 years!
Preparing a Binding Financial Agreement is bit of a forecasting exercise. Generally, once signed a Binding Financial Agreement remains in place until either it is terminated by agreement, set aside by the Court or comes into effect due to the parties’ separation. This means that you need to assume when negotiating the terms that it is going to remain in place and could apply even if you are separating in 50 (or more) years’ time. Although we generally advise periodic review of Agreements, this needs to be done by agreement so should not be relied upon.
4. How will you negotiate what the Agreement actually says?
We are experts in helping you to negotiate an Agreement in a way which is positive for your relationship rather than damaging and which avoids the awkwardness you might experience if you were trying to do it unassisted. We usually suggest:
- Consider getting advice from an experienced family lawyer before you raise it with your partner. We can assist you to come up with a plan for how to have the discussion and frame to your partner why it is important to you and to your relationship;
- Prepare for the discussion (as you would for any difficult conversation);
- Allow sufficient time and an appropriate setting to have a good conversation;
- Frame it as a positive thing and as a process which should be beneficial to both of you;
- Ensure that the discussions consider issues which are important to both of you and that your partner is (and feels) heard.
Some clients choose to use a Collaborative Law process to negotiate their Binding Financial Agreement. This involves your partner engaging a Collaborative Lawyer (like us), and we all sit in a room together to negotiate the Agreement. This can be a great way to ensure that it doesn’t feel like a conventional legal process but more like a problem-solving exercise to set you up for the future.
5. When should I enter into a Binding Financial Agreement?
A Binding Financial Agreement can be entered into at any time – before you start living together, while you are living together, before or after marriage or even after separation. Often an inheritance or gift or anticipated inheritance or gift triggers one or both parties to think about entering into one. If you are considering this possibility, we usually suggest that you get advice about it as early as possible.
Lastly, don’t skimp on who advises you and drafts the Agreement for you. If you decide you want a Binding Financial Agreement to protect you, then it is important that it actually does that. Don’t have budget BFA regret – pay to get it done properly by expert family lawyers.
If you are considering getting a Binding Financial Agreement, or want to discuss anything relating to asset protection or a family law matter please reach out to us on the details below.
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Article By: Zoe Behrens
Family Lawyer based in Sydney
Zoe graduated from the University of Technology, Sydney and began her career working at the Administrative Appeals Tribunal and then the ACT Magistrates Court as a Legal Associate. At university her combined Management and Law degrees developed her interest in people and behavioural science- which led her to pursue a career in family law. She is particularly interested in matters involving family violence.