by mia Eddy, Paralegal, Orbell Family Lawyers
As we age, protecting our assets becomes increasingly important, especially when entering into a new relationship. This is particularly the case for those who may have already been through separation and know how difficult/expensive the process can be and for those wanting to make sure that their estate planning wishes are carried out.
Financial Agreements (sometimes referred to as Binding Financial Agreements, or, in America, “prenups”), can be an effective way of documenting a legal agreement between couples (either before, during or after their relationship) about how their assets will be divided in the unfortunate event of separation.
Mia Eddy, Paralegal at Orbell Family Lawyers provides a helpful guide to Financial Agreements, including their advantages, disadvantages and why you might consider one.
A Financial Agreement is a legally enforceable contract that couples can enter into at various stages of their relationship, including:
- Before a de facto relationship starts;
- During a de facto relationship;
- After a de facto relationship breaks down;
- Prior to marriage (where marriage is intended);
- During marriage;
- After a marriage breaks down, but before divorce; and
- After divorce.
Financial Agreements are designed to provide certainty around financial matters and can provide exactly what will happen if the relationship breaks down and who will keep what.
Financial Agreements usually cover the following:
- Whether assets are to be quarantined and kept separate (i.e. property that each party owns at the start of the relationship being free from a claim by the other party).
- How assets like houses/investment properties, shares, bank accounts, superannuation, cars, jewellery etc. will be divided.
- Who will pay for liabilities (including mortgages, credit cards, loans etc.).
- How businesses owned by one or both parties will be dealt with.
- Protection of inheritances or future inheritances (i.e. keeping these separate/ free from a claim).
- Maintenance (financial support to one party from the other after separation and whether this will be included or intentionally excluded to prevent a future claim).
Why should I consider a Financial Agreement?
Financial Agreements offer several advantages for couples wanting certainty around their financial relationship. They can help couples ‘get on the same page’ by having early discussions regarding expectations, including who will pay for what during the relationship, whether assets held by each party at the start will be free from claim and what happens if the relationship breaks down.
While these conversations can be tricky and uncomfortable, they are important to have and can help to identify possible concerns early on (and to address them) and to prevent unrealistic expectations around financial matters (and entitlements in the event of separation).
Knowing exactly what will happen in the event of a future separation (and agreeing on this early) can provide peace of mind for couples and reduce conflict. Whilst some couples might never need their Financial Agreement (it works like an insurance policy that you hope you will never need), for those that do, having a Financial Agreement in place can save a lot of money and emotional stress that is involved in separation and litigation if people can’t agree on their financial settlement.
Financial Agreements can be particularly beneficial in situations where:
- One or both parties have children from previous relationships and wish to protect their assets for their children’s inheritance and prevent a claim by the other party;
- If one party comes into the relationship with assets of a high value (including property/ shares/ superannuation) and the other party has a lot less;
- If one party comes into the relationship with a lot of debt and the other party wants to make sure they don’t become liable;
- Where parties want to prevent a future claim for maintenance by the other; and
- One or both parties own a business and they want to protect the business to ensure smooth operations in case of separation.
Enforceability of Financial Agreements
Financial Agreements can be a useful tool to provide certainty around future financial arrangements and particularly what happens in the event of a separation.
They can prevent drawn out legal negotiations and Court proceedings being necessary. They can protect assets, avoid maintenance being paid and save couples a lot of money and stress.
However, it is vital that Financial Agreements are prepared properly by specialist family lawyers to ensure that the strict legal requirements are met and that couples get the protection they need.
This includes making sure that:
- The Financial Agreement has to be drafted in a particular way to ensure the agreement reached is legally enforceable and binding.
- The Agreement is in writing and signed by both parties.
- Both parties have a chance to request information and documents about the other party’s financial circumstances so that they can make an informed decision about the agreement. This includes exchanging documents like bank statements, tax returns, superannuation statements and in some cases getting valuations done.
- Each party receives independent legal advice about the Financial Agreement, including about whether the Agreement is fair for that party and what rights that party could be giving up by entering into the Financial Agreement.
There is a risk that Financial Agreements can be set aside by the Court if the above does not occur and/ or if the following applies:
- If one or both parties were dishonest about their financial situation (including failing to disclose significant assets/ debt);
- If the agreement is not drafted properly and is not capable of enforcement;
- If a party was pressured into signing the Financial Agreement;
- If a party did not get proper legal advice; and/ or
- If there have been significant changes, including regarding children of a party/ the parties and where the changes could result in hardship to a child/ party.
Disadvantages of Financial Agreements
Despite the benefits of Financial Agreements, there are a number of drawbacks that should be considered prior to entering into one.
Having the initial conversation can be hard and could create a sense that you don’t trust your partner or think they are ‘coming after your money’. This can place pressure on the relationship which can be hard in the early stages of a relationship.
The process of discussing and drafting a Financial Agreement is essentially planning for the future failure of a relationship, which is a sensitive topic and can be emotionally challenging. It can help to get advice about how best to have the conversation and things that can help to make it less uncomfortable for both parties.
Financial Agreements require both parties to get independent legal advice and this can be expensive. However, if you compare the initial cost against the possible future costs if the relationship breaks down and you can’t agree on what happens, it is usually a fraction of the cost, especially compared with Court proceedings.
Financial Agreements might need to be reviewed and updated to ensure they remain consistent with changes to the law and that any changes in circumstances are reflected. This can also add costs but is important to ensure the protection of the Agreement remains in place.
Conclusion
Financial Agreements offer couples a practical solution for managing their financial affairs and protecting their assets. They provide many benefits, including increased transparency and security within a relationship and clear expectations in the unfortunate event the relationship was to break down.
If you are considering a Financial Agreement, it is crucial (and a requirement) that you seek professional legal advice and this should always be with a specialist family lawyer who is up to date on the legal requirements for Financial Agreements and can ensure that you don’t waste money on a Financial Agreement that won’t protect you.
If you would like further information regarding this article or your family law matter in general, please contact us.
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