The benefits of a Binding Financial Agreement
The idea of a “pre-nup” has traditionally been considered a romance killer, a reflection of a lack of commitment by at least one of the parties to a marriage, or subject to the Hollywood stereotype of a rich old man marrying a gold-digger.
In Australia the “pre-nup” is called a “Binding Financial Agreement”. The amendments to the Family Law Act 1975 extend Binding Financial Agreements to those in a de facto relationship.
Increasingly in Australia traditional perceptions are giving way to the acknowledgement that a Binding Financial Agreement is a practical solution to the reality of the statistics regarding the number of marriages that end in divorce. More than that, a Binding Financial Agreement accommodates the complexities arising in blended families where people are entering into their second and subsequent relationships with property from their previous relationships.
Coping with the emotional pain, stress and turmoil of a relationship breakdown can be made manifestly more difficult by having to negotiate the business of the break-up. Parties to the relationship have little time to mourn the loss of the relationship and recover some equilibrium before launching into the practicalities of the situation, like, who will retain the former family home? How will the other person afford to live somewhere else? What happens to the investment property? Even the most amicable of break-ups can produce anxiety and fear for the future for the parties to the relationship and feelings of dread and discomfort at having to discuss how to sever financial ties with the other person in an emotionally charged situation. For those whose relationship breakdown is not amicable, the desire for certainty, fear about lost future security and the lack of specificity about the financial contributions by both at the commencement of the relationship can fuel the ferocity of negotiations and push them towards undesired, but necessary, Court proceedings.
The existence of a Binding Financial Agreement, whilst not eliminating the feelings of hurt and anxiety, can alleviate some of the tension of the break-up and the necessity for any Court proceedings.
A Binding Financial Agreement sets out the financial circumstances of each person to the marriage or de facto relationship, including the assets and liabilities each person is bringing into the relationship. The Binding Financial Agreement also sets out what should happen to that property and any property the spouses accumulate jointly and separately during the relationship in the event the relationship breaks down. Both parties must receive independent legal advice before entering into the Binding Financial Agreement. The solicitor for each party must sign a “Certificate of Independent Advice” confirming that that each person has been informed of the advantages and disadvantages of entering into the Agreement. Generally, the Binding Financial Agreement comes into effect upon one of the parties to the marriage signing the ‘Separation Declaration’ to the Agreement, which states that the parties separated and are unlikely to resume co-habitation.
Essentially, a Binding Financial Agreement provides the parties to a marriage or relationship with the certainty of a ‘to-do’ list if they ever need a property settlement. Whilst a Binding Financial Agreement cannot be a crystal ball and list all the assets and liabilities the parties to the marriage will acquire during their relationship, the Agreement can set out how the parties want to divide any property they do accumulate and the manual steps for achieving the division.
The benefits of a Binding Financial Agreement are particularly important for those considering entering into their second de facto relationship or marriage. Under theFamily 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.
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.