Most people would like to avoid having to get involved in lengthy and nasty court disputes if they are unfortunate enough to go through a divorce, separation or even a breakdown of the relationship between fellow property investors– Binding Financial Agreements, commonly known as “Pre-Nups” by the public or “BFA”s among the legal fraternity, are a way of achieving this.
By opting to have a binding financial agreement when entering a domestic relationship or marriage, you can minimise your potential exposure should your relationship with your partner not go the distance.
Why is considering a Binding Financial Agreement worthwhile?
Binding Financial Agreements have become arguably the most effective tool for quarantining assets held prior to the commencement of a domestic relationship. Given people now marry or form domestic partnerships at a much later age than in previous generations, individuals have usually accumulated property and prized possessions which they wish to quarantine from potential claims in the event the relationship or marriage sours.
Many couples these days become domestic partners or marry later in life than their parent’s generation did. This means that they have often bought property or founded a company before they partner up. Given that 1 in 3 marriages end in divorce we see many people justifiably concerned to avoid nasty disputes over their hard-earned property.
Couples should be aware that in the eyes of the Family Court, once you move in with someone and live as domestic partners, your assets are treated as if you are married after 2 years, so avoiding an actual wedding is not sufficient to protect your assets. Your de-facto partner has 2 years from the date of separation to make a claim on your assets if they can establish one of the following:
- You lived together as a couple on a “genuine domestic basis” for two years; or
- You have a child together; or
- They made substantial contributions to your property and there would be serious injustice if they were not permitted to bring a claim. Substantial contributions is where things get interesting – these can range from painting your house, to cooking your dinner or doing the gardening, to providing emotional support or child care that enabled you to run a successful business.
Categories of clients who can most benefit from a Binding Financial Agreement
Some companies resolve that all directors must enter into binding financial agreements with their spouses as a means of risk mitigation to the company. They help prevent the business from being dragged into Family Court proceedings if one of the directors divorces and their financial affairs are investigated.
Those with disparities in asset positions particularly those who may be embarking on second marriages:
Binding Financial Agreements are particularly attractive for couples who may have significant disparity in assets and age, given that once you are in a domestic relationship, non-financial contributions start to stack up as contributions to the relationship, such as if the other party always cooked the meals, did the housework or looked after children. These types of contributions may be given equal weight to the financial contributions made by the other partner who may have been a stay at home parent, particularly in the case of longer relationships. We see Binding Financial Agreements as particularly useful for clients who may already have gone through a divorce and be keen to avoid disputes if their new relationship does not last.
Parents lending or gifting money to their adult children to assist in a property purchase:
With many parents now gifting their adult children large sums to enter the property market, we are seeing many baby boomer parents encouraging their children to enter into a Binding Financial Agreement with their partner as a means of protecting such gifts. Binding Financial Agreements allow the contribution to be retained in the event of a relationship breakdown, so that it is quarantined from the assets of the marriage that can be divided up should the relationship fail. Many see this as a prudent means of asset protection, particularly if the parents wish to help their adult child break into the property market but have reservations about their child’s choice of partner.
People entering second marriages with children from the first marriage:
Someone with adult children from a first marriage marrying for the second time, who wishes to ensure that certain assets intended for the children of the first marriage are protected from claims in the event the second marriage breaks down, are another category who can be assisted by getting a Binding Financial Agreement, which in this case can go a long way to enabling family harmony. The Binding Financial Agreement could also help the second wife, by allowing for a home for the second wife if the marriage broke down. The Binding Financial Agreement could also include that if either party dies without separating, the survivor will not make a claim on the estate of the deceased spouse. This would comfort the children of the first relationship, who might be hoping to inherit without their ‘evil’ step-mother getting everything, making family dynamics easier.
Someone who may own a house from a previous relationship but wants their new partner to move in:
A Binding Financial Agreement could provide that the house remains separate property on a relationship breakdown, and that only assets accrued during the marriage are liable to be divided up.
A couple might specifically agree to exclude prior owned assets and any inheritances or bequests received during the relationship. They might otherwise agree to equally share any assets they acquire during their relationship.
A high net worth person with assets of say $20 million may seek a BFA whereby a fixed sum of say $2 million is ultimately payable to the other party on separation. Provided the amount was reasonable given the overall asset picture, the Family Court is unlikely to interfere with the ‘fairness’ of such an agreement.
Other methods of protecting assets from claims relating to domestic relationships and why Binding Financial Agreements provide the ultimate protection
Family trusts are not as effective as Binding Financial Agreements in keeping assets quarantined, as the income earned will be considered a resource liable for division by the Family Court. Also in the long term it is difficult to keep control of trust assets away from the next generation, meaning that trusts will become vulnerable to divorce claims.
Some families try to use Loan agreements for funds given by parents to children to assist in property purchase, however unless both spouses sign the loan agreement and the terms of repayment are strictly adhered to, they will be treated by the Family Court as unlikely to be repaid, and thus a gift to both parties to the marriage, liable to be divided up upon separation.
The bottom line is that if you separate from your partner, a well drafted Binding Financial Agreement is far better to have than not have, as it will at the very least narrow any issues in dispute and the cost and difficulty of challenging a well drafted Binding Financial Agreement will put-off most potential claimants from bringing a claim. Providing your Binding Financial Agreement is reasonable and well drafted in accordance with the requirements, it should provide an almost impregnable defence.
Binding Financial Agreements may also be used by clients as a means of resolving their property settlement at the end of a relationship, and enable a couple who have reached agreement to avoid the need for Court orders. Binding Financial Agreements may also be entered into at any time during a relationship, and can provide a means of security for a party concerned about how changes in family dynamics may play out.
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This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Legally Yours Pty Ltd accepts or assumes responsibility, or has any liability, to any person in respect of this article.