Binding Financial Agreements (BFAs) in Family Law
Financial Agreements (aka ‘Binding Financial Agreements’, ‘BFAs’ or ‘Prenuptial Agreements’ as they are often referred to by the public) are Agreements which set out what is to happen in relation to property settlement and/or spousal maintenance in the event of a relationship breakdown.
Couples can enter into a BFA at any time; those who are engaged or planning on getting married, or are currently married, those who are planning on moving in together or starting a de facto relationship, and those who are separated or even divorced can use a Financial Agreement.
A Financial Agreement basically acts as an insurance policy. It can give you piece of mind so that you know that if something does go wrong and there is a separation, both parties are clear on what is to happen. We find that when parties enter into Financial Agreements, it can actually strengthen a relationship because it reduces the stress on the parties (and the relationship) by the parties knowing that they both have a clear understanding of what is to happen if there is a separation.
A Financial Agreement is not about being unfair, but it is about reducing the potential for a dispute (which is often the worst, and most costly, part of the separation) later.
More and more people want to be able to decide for themselves how to use their property and what should happen after a separation. Financial Agreement can also be used to protect property that people have accumulated before the relationship or property that they’re going to receive such as inheritances or gifts from family. Sometimes Financial Agreement are used to protect the inheritance of children from a first relationship. A relationship breakdown usually causes significant emotional pain which is made worse by the stress and uncertainty of not knowing what the outcome is going to be or being worried about spending money on lawyers and time negotiating or fighting about property. Some of the things that people going through a separation worry about are:
- Who will retain the former family home?
- How will the other person afford to live somewhere else?
- What happens to the investment property?
- How will I afford to pay all the bills?
Even those who have an amicable break up can feel anxiety and fear and talking about what is going to happen to property is often one of the most difficult and stressful discussions anyone has in their life. If the break-up isn’t amicable then it’s even worse. Anger, grief, and the worry about uncertainty can drive people towards costly, difficult, but necessary court proceedings.
Having a Binding Financial Agreement in place doesn’t make the emotional part of a separation go away but it means that there isn’t a fight about property and everyone knows where they stand. Importantly everyone can make financial decisions during the relationship knowing what the consequences are if there is a separation and so they can make informed choices.
A Financial Agreement can protect your business, company(s) and Trusts(s) from a claim from your ex-partner. It can also be an important tool in estate and succession planning and protecting wealth of different generations of the family who would not necessarily be a party to the relationship.
One of the most effective uses of a financial agreement is where several people operate a business together. If one of the business owner’s relationship breaks down that can have a significant and devastating effect on the business; it might be that the business is the most valuable asset and a payout has to be funded which affects the others, or even the fact of having an owner distracted by proceedings that last years or having valuations and forensic analyses done can effect everyone else. A Financial Agreement can set out what is to happen so that the non-business owning spouse is looked after but it is done in a way that protects the business, its cash-flow and is structured in a tax-effective way.
Can a Binding Financial Agreement protect a future inheritance?
Yes. Those starting a relationship, especially when there is a family wealth; issues of potential future inheritances; blended families; second relationships; or where there is a disparity between the parties’ financial circumstances should consider a Financial Agreement. Even once you are in a relationship it is still possible to enter into a Financial Agreement.
Binding Financial Agreements that cover both de facto relationships and marriage
People who are living together and want the certainty of a financial agreement which sets out what will happen to their assets if they separate, may consider entering into a financial agreement which covers both the de facto relationship and what happens if they marry.
At Farrar Gesini Dunn, we have experience in drafting the financial agreements including an agreement which covers both scenarios.
Benefits of BFAs for Second Marriage or Defacto Relationship
The benefits of a Binding Financial Agreement are particularly important for those considering entering into their second de facto relationship or marriage. Under the Family Law Act, whilst the assets each party brings into the relationship are taken into account as are later contributions by the relevant party, all assets are included in the property pool for division. The result for some is the discovery that assets they had in their mind excluded from the property pool (e.g. an inheritance) now form part of the divisible property pool. Those embarking upon a second relationship blending families with adult children should consider a Binding Financial Agreement in conjunction with an Estate Plan.
How should a financial agreement be drafted?
A Binding Financial Agreement should be drafted in such a way that it deals with the division of real property, shares, investments, motor vehicles, property held in trust and corporate structures and inheritances received by both parties. It is a complex document drafted to cover as possible scenarios in the event of separation. The advice of a solicitor is not only recommended, but a mandatory requirement for the validity of the document.
A Financial Agreement needs to be prepared carefully and properly and by a lawyer who specialises in them. Many firms won’t do Financial Agreements because of the risk and the level of expertise required. We have specialist lawyers who focus on Financial Agreements, who stay on top of the developments in the law and who have specialist skills and knowledge in this area.
It is also possible to enter into a Financial Agreement once the relationship has come to an end, or where the parties have divorced. There are some circumstances when this may be appropriate and other circumstances in which we would advise against finalising matters with a Financial Agreement rather than Consent Orders.
A Financial Agreement is the only way stop the Court from awarding spousal maintenance. Therefor depending on your circumstances, we can advise you on whether you should be entering into a Financial Agreement when the separation has already occurred as part of your overall method of formalising the agreement about financial matters.
When will a Financial Agreement be binding
There are a number of requirements which are necessary in order for the Financial Agreement to be binding. One of these requirements is that you and your partner must obtain specific independent legal advice prior to signing the Agreement.
We can assist you with any questions you may have in relation to Financial Agreements.
If you would like further information in relation to Financial Agreements, please call or email us to make an appointment with one of our lawyers.
Family Lawyers in NSW
phone (02) 9045 2600
Family Lawyers in VIC
phone (03) 8376 7000
Family Lawyers in the ACT
Phone (02) 6115 9000
Sarah Keenan is our go-to expert for financial agreements. She has a particular nous for difficult questions of law and is a natural strategist. Sarah’s passion is getting outcomes that work, most of the time by helping clients reach agreement but by fighting hard in court if that is what is needed. Those skills enable her to formulate settlement options that deliver better outcomes for her client and she is a master tactician in litigated cases.
In second or subsequent relationships including to protect assets for the benefit of children from a previous relationship
Mary and John are in their 50s. Each have children from their previous relationships and each own assets, although Mary is more wealthy than John. Mary and John enter into a financial agreement that says that property in Mary’s name (or owned by a Trust defined as Mary’s Trust) is hers, that property in John’s name (or owned by a Trust defined as John’s Trust) is his, and that any property in joint names is to be shared according to legal title. Mary and John’s children are happy knowing that their inheritance is protected. Mary and John are happy to know where they stand and being able to make informed financial decisions with known consequences if they separate.
When one party is going to receive a large gift or inheritance that they want to protect
George and Lina have accumulated assets over their lives and would like to help their two adult children set themselves up financially. They tell their children that they’d like to give them $500,000 each but they want them to enter into a financial agreement with their partners so that if they separate that money goes to George and Lina’s child and not their former partner. George and Lina’s children enter into financial agreements with their spouses that say that if they separate all assets, regardless of whose name they’re in or how they’re owned, are included in one pool. George and Lina’s child receives the first $500,000 and the balance is divided equally.
Where an interest in a business is the major asset; to have provisions regarding valuation and timing of payments to ensure a commercial and tax effective outcome
Paul and Sarah own a financial planning firm that is doing really well. They have 2 key staff they’d like to bring on board and make equity owners. Those 2 staff members are in their early 30s with young children and (relatively) few assets. Paul and Sarah make having a financial agreement with their spouses a condition of buy-in. The 2 new owners enter into a financial agreement with their spouses that is still fair to them but that says how their interest in the business is to be valued and that provides that any payment to the spouse is staggered to protect cashflow.