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Family Law Blog

Binding Financial Agreements – A Comprehensive Guide

Binding financial agreements (BFAs) are an important element for formalising property settlements under the Family Law Act.

In this guide we’ll work through the fundamental elements of a binding financial agreement so that you understand what they cover, how they work, and what things can go wrong if you don’t have the right procedures in place.

What is a Binding Financial Agreement?

A binding financial agreement is a contract between two people in (or about to be in) an intimate relationship or after separation in which they agree on the treatment of their assets and income after separation.

Unlike most normal contracts or business deals, however, binding financial agreements have specific rules and requirements that need to be complied with in order to be enforceable.

This is because the legal system acknowledges that agreements between couples come with certain risks, and therefore has sought to ensure that those making a binding financial agreement are doing so in a fully informed and voluntary way.

When can You Get a Binding Financial Agreement?

Realistically, you should consider a binding financial agreement at multiple relevant points during your relationship, in particular at any time where a newer relationship might become more serious or where a property settlement might become needed if you separate. That might include:

  1. Before moving in together;
  2. Before buying any significant property together;
  3. Before marriage;
  4. During marriage, especially if one of you may receive a large inheritance or similar windfall gain; and
  5. If you are separating or divorcing.

Let’s now look at the three main timings that you can consider a binding financial agreement.

The Three Main Times to Consider a Financial Agreement

While there are a variety of life circumstances and events that might have you considering a binding financial agreement, they all fall within three main buckets:

  1. Agreements made before marriage/relationship (pre-nup)
  2. Agreements made during marriage/relationship (sometimes called a mid-nup)
  3. Agreements made after separation (sometimes called a post-nup).

To save the word count a bit we’ll just refer to “marriage” however these comments apply equally to de facto relationships.

Let’s take a look at the characteristics of each. After that, we’ll cover some general principles that apply to all financial agreements irrespective of their timing.

Binding Financial Agreement Before Marriage

While not necessarily the most common, the “pre-nup” is probably the most well-known form of binding financial agreement.

After all, most spectacular celebrity separations or divorces tend to involve abundant discussion about whether there was a pre-nup, whether it is enforceable, and whether it will affect how much person X gets from person Y.

In Australia, the formal definition of a financial agreement before marriage is where you:

  1. are contemplating entering into a marriage with each other;
  2. are not a “spouse” party to any other binding agreement in relation to the same matters;
  3. put the agreement in writing;
  4. have the agreement deal with one or more defined topics around finances and property (more on this below); and
  5. state that the agreement is made under the relevant section of the Family Law Act (this differs depending on the timing of the agreement and whether your relationship is moving towards marriage or de facto).

There are also formal requirements for the agreement to be binding, which we discuss more below.

The dominant purpose of a pre-nup is to provide clarity for both spouses about what is to happen financially in the event of separation.

Often they are used in circumstances where one person has significantly greater income or assets than the other at the commencement of the marriage. This offers that person some protection from the fear (whether justified or otherwise) that their partner will marry them and then swiftly seek separation only to claim a significant portion of their wealth.

On the other hand, for a spouse that might be giving up a career or coming to a relationship with limited ability to support themselves, a pre-nup can also offer comfort around the future possibility of financial maintenance in the event that they separate and are not able to support themselves.

Done right, a prenup should both offer protection and comfort for the interests of both parties. Most importantly though, it gives clarity at a time when the relationship is on solid footing and everyone is thinking in fair and reasonable terms (which is not always the case if a relationship breaks down).

Binding Financial Agreement During Marriage

A “mid-nup” is something that many people do not know about. It is a financial agreement prepared during the course of a marriage or de facto relationship.

The formal definition is essentially the same as that we set out above for a pre-nup, except that in this case you are not making the agreement in contemplation of marriage, but rather during marriage.

So the question is, if you and your spouse have already gotten together and avoided making a pre-nup, why might you consider putting a financial agreement in place during your relationship?

The first and most obvious possibility is that you simply didn’t think about it. With personal relationships, there is every chance that in the excitement nobody stopped and turned their mind to whether a financial agreement might be a good idea. Then, after a little while, perhaps your mind turned to such things and you started to think that having something in place is not a bad idea.

Next, perhaps you did not have a proper understanding of your partner’s financial situation. Many people are wary about being transparent about their financial position, and perhaps one or both of you just didn’t have all the details. Once you did, then it’s possible you realised that a financial agreement would bring the kind of protection or comfort we discussed above for a pre-nup.

It’s also possible that a de facto relationship kind of “snuck up on you”. Because of the nature of de facto relationships, it might be that you ended up in one and didn’t quite realise it for a little while because it was simply a steady progression of a growing relationship rather than the clarion wedding bells of a formal ceremony. Once you do realise you’re in a de facto relationship, you might decide to raise the topic of a financial agreement with your partner.

Finally, you might consider a mid-nup where one or both of you come into significant unexpected wealth. One common way this happens is through an inheritance, but it could also happen with investments, business ventures, or other unexpected windfalls for the benefit of one but not both partners.

So as you can see, just because you’ve put the ring on your finger it doesn’t mean that there aren’t still good times or reasons to consider getting a binding financial agreement in place.

Binding Financial Agreement After Separation

Many separations involve a binding financial agreement. Many people would not put these into the same category as first two because they happen after the relationship breaks down, but in legal terms there is little difference.

Similarly in practical terms, an agreement after separation deals with the same kinds of topics as those beforehand: distribution of property and wealth and the provision (if any) of maintenance by one spouse to the other, amongst other things.

For this guide, however, we will not deal in much detail with binding financial agreements after separation, because our separation process article and our property settlement article set out a lot more detail on this, so if you’re in that situation we recommend you have a read of those

What Topics Can/Should a Financial Agreement Deal With?

So now that we’ve looked in detail at timing and life events connected with binding financial agreements, it’s time to turn to what topics an agreement can (or should) actually deal with.

In big picture terms, a binding financial agreement can (and usually does) deal in some way with the appropriate distribution of property, future financial support, agreements in respect of children, and related issues in the event you separate.

In practical terms that means a binding financial agreement will commonly deal with things like:

  1. what happens with wealth or property that one or both spouses had prior to the start of the relationship;
  2. what happens with property acquired or income earned during the relationship;
  3. what should happen with the family home, if there is one;
  4. how should large receipts or inheritances be treated;
  5. whether either spouse should receive maintenance payments after separation, and if so what they should be and how long they should be paid;
  6. who is to contribute to the ongoing costs of raising children and in what proportions; and
  7. how can family businesses, farms or other important heirloom-type property be preserved for future generations.

What are the Formal Requirements of a Binding Financial Agreement?

As we mentioned above, financial agreements between intimate partners aren’t treated the same as normal business contracts. They have specific requirements to ensure that each partner is appropriately protected and advised about the impact of the agreement.

A financial agreement will be “binding” if it meets the requirements set out in the Family Law Act. That means:

  1. It must be in writing and signed by both parties;
  2. The parties to it are married or in a de facto relationship (or contemplating being so), or have separated or divorced;
  3. Each party must have received independent legal advice about their rights and the specific pros and cons of the agreement prior to signing, and the agreement must contain a statement to that effect;
  4. Either before or when signing, the parties must have received statements from each lawyer that they gave the advice in (3); and
  5. The parties need to have made full financial disclosure to each other.

What Information Do Your Family Lawyers Need to Prepare and Advise on a Binding Financial Agreement?

You can see from the above that you are going to need family lawyers involved in preparing a binding financial agreement, because at the very least they will need to give you proper advice about it before you sign.

More likely you will also involve your family lawyers in preparing or negotiating the agreement.

For us to help prepare and/or advise you about a binding financial agreement, what kinds of documents might we need to help? Generally, most of what is needed results from the requirement for “full financial disclosure” that we mention above. This ensures that the agreement covers all relevant topics and that the advice you receive is actually helpful. That might include things like:

  1. Information about all income from all sources, including investments and property, superannuation, overseas holdings;
  2. All debt information include loans, mortgages, HECS/HELP, investing loans or anything else;
  3. Any indirect earnings such as trust distributions;
  4. Details of any property that you have the benefit of but don’t necessarily own (eg a car owned by your business that you use for personal use);
  5. Details about any significant property you have disposed of in the last year;
  6. Both a list and estimated value of all assets you own at the time.

Ideally providing this information in the form of primary source material is best where possible – bank statements, mortgage statements, HECS documentation, superannuation reports and the like.

In addition though, information about the relationship in question is useful. For example, when did your relationship commence, when did you become “de facto” (or if you don’t know that, information about how your relationship developed to this point), whether you had any previous serious relationships, agreements or documents that might be relevant, whether you have any children of this or a previous relationship.

More likely than not, once we have received that information we will have questions for you to help flesh out our understanding of the relevant circumstances.

All of this helps us to gauge the advantages and disadvantages to you in the proposed binding financial agreement. It also helps us ensure that the agreement covers all the factors that are relevant to you now, and potentially into the future.

Can you Terminate or Set Aside a Binding Financial Agreement?

A binding financial agreement can be set aside in some circumstances, which mostly serve to highlight the importance of getting independent advice and making full disclosure to your spouse.

The most obvious time a BFA might be set aside is where the agreement was made in a way that did not comply with the formal requirements we have set out above. For example, if one party did not receive independent legal advice, then the agreement will not likely be enforced because it did not meet the basic requirements of the Family Law Act.

Agreements have been set aside in a number of other circumstances including:

  1. If one party signed the agreement under duress;
  2. If there was fraud or material non-disclosure of financial assets;
  3. If there has been a material change in circumstances since the agreement was made, such that one party would suffer serious hardship if the BFA was enforced; and
  4. If one party’s conduct in making the BFA is found to have been unconscionable.

Of course, every circumstance is unique and a Court is always going to look at all of the relevant factors before making a decision.

As a general principle, if you are considering signing a binding financial agreement you should assume it is going to be binding on you, treat the process seriously and ask any questions you need before signing.

How do you Get a Binding Financial Agreement?

In practical terms then, what is going to happen if you want to get a binding financial agreement in place with your relationship?

We have set out the process that Accessible Family Law goes through with our BFA clients on our “prenup lawyers” page here.

If you are looking at getting a binding financial agreement, get in touch today and we can get you started on the process.

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