DISCUSSING a prenuptial agreement — or binding financial agreement, as it is known under the Family Law Act — is hardly the most romantic way to start a marriage.
But for many people, it may be the most important document ever signed.
No longer an exclusive financial risk-management tool for Hollywood celebrities, increasing numbers of less famous couples are known to be opting for written agreements to protect the financial assets each partner brings to the relationship.
It’s the same type of agreement that is increasingly likely to be drawn up after a relationship has ended, as a preferred way of dividing up assets outside the public eye of the courts.
Heart or head: weighing up the prenup THE PROS
- Can protect inheritance rights of children and grandchildren from a previous marriage.
- Can protect a business or professional practice from being divided and subject to the control or involvement of a former spouse at divorce.
- Can limit the amount of spousal support that one spouse will have to pay the other at divorce.
- Can protect financial interests of older persons, those entering second or subsequent marriages, and persons with substantial wealth.
THE CONS
- Possibly giving up your right to inherit from a spouse’s estate when he or she dies. Under other law, a spouse may be entitled to a portion of the estate even if the other spouse does not include a provision in his or her will.
- Any contribution made to the success of a spouse’s business by entertaining clients and taking care of the home may mean you can’t claim a share of a rise in its value if agreed in a BFA.
- Starting a relationship with a contract can engender a feeling that trust is lacking.
Jenny Weaver, financial planner with wealth management and stockbroking firm Prescott Securities, says the popularity of binding financial agreements (BFAs) shows men and women are taking more financial and legal precautions against a relationship breakdown.
“Most see it as a form of insurance — a legally binding safety net which they hope to never need,” she says.
Sarah Bastian-Jordan, associate with family law firm Murdoch Lawyers, says couples planning on getting married can enter into a binding financial agreement pursuant to s.90B of the Family Law Act.
Couples already married can also have a binding financial agreement, but it is made pursuant to s.90C of the Family Law Act.
While the law for married couples is the same throughout Australia, the law for de facto and homosexual couples varies between states.
Bastian-Jordan says some de factos and same-sex couples only have the option of executing a “cohabitation agreement”, which in most states is tailored to the requirements of the Property Law Act.
If the same-sex or de facto couple separate, the agreement is called a “separation agreement”. As Jackie Vincent, partner and accredited family law specialist with Watt’s McCray, explains: “The effect of the agreements is to prevent either party making an application to the Family Court for the division of property.”
They can carry as much detail as a couple want but to be binding they usually contain key elements, including the case facts (the names and the ages of the people involved, whether there are any children, a detailed list of the assets and whose name are they in) and the mechanics (if we are to separate, then one party is to get X and the other is to pay X).
Other details may include whether the division of property will be different if the couple separates after a longer period (eg, two years versus 10 years).
They need to take into account future possibilities such as children. They may need to include dates for review or the date the agreement ends.
If children arrive and they are not mentioned in the BFA, then the BFA will not be binding.
Vincent says an agreement can cover child support but this part must be separately registered with the Child Support Agency. If there is a material change in circumstances relating to the care of a child, then this part of the agreement can be changed.
The issue of spousal maintenance is separate. If it is made part of a BFA then it is binding and neither party can apply to the Family Court for changes.
Custody of children can only be decided by the Family Court.
Vincent says the third element is the certificate of independent legal advice that is an absolute must-have for the agreement to be binding.
Essentially it is a statement signed by the lawyer for each party, saying they have been given independent advice.
Vincent says the tax benefits of a financial agreement should not be ignored.
If the transfer of property ownership is agreed to within an agreement, then no stamp duty is payable on transfer or sale.
Capital gains tax rollover relief may also be applicable. After having a financial agreement drawn up, it can then be put in a safe place — such as with a lawyer — for use if and when the couple separate. It should be reviewed if circumstances change.
According to Caroline Counsel, of Caroline Counsel Family Lawyers, if a financial agreement does not specify what is to happen on the birth of children — and they arrive — it is probably not binding.
It is for this reason that she cautions younger women contemplating a financial agreement.
“For young couples, unless one has enormous amounts of property to protect, it may be better to leave the issue of spousal maintenance open,” Counsel says.
“It is OK to write in contingencies but as no one can say what is going to happen with children and their needs in years to come, then some people may be better off retaining their rights within the Family Court,” she says.
A financial agreement will mean forgoing remedies in relation to property division and spousal maintenance to which you would otherwise be entitled under the Family Law Act.
“If you are the one who is likely to be financially dependent at some stage in the marriage, you will need to understand the consequences of signing such an agreement and weighing that up against likely benefits,” Counsel says. She joins other professionals in highly recommending financial agreements for people entering a second marriage or relationship who have been through a difficult settlement.
“They are a perfect fit with collaborative law, which means that the clients own the process — not the lawyers or the courts,” she says.
Prescott’s Weaver says while previously married couples want to protect themselves against claims, in many cases they also want to protect assets they accumulated during a previous marriage, for their children’s sake.
In such a case it could be written into a financial agreement that children born of a first marriage be provided for in the event a subsequent relationship ends.
In all likelihood the directions would be similar to what would be written into a will, which would automatically come into place in the event of death.
Robert Monahan, senior estate planner with Australian Executor Trustees Ltd, says prenups can be useful in estate planning as they can help achieve some certainty, particularly for people in second marriages or relationships with children from previous relationships.
“In those situations, the challenge is to find the right balance between providing firstly for the future security of your partner, and secondly the expectations and needs of your own children.
“In my experience, a happy ‘Brady Bunch’ is a rarity,” Monahan says.
“Clients often structure their assets so that the surviving spouse can have the use of the assets or income from the assets during their lifetime, but the assets ultimately pass to their respective children. Binding financial agreements provide another way in which clients can ensure their long-term estate planning goals are not wrecked by a failed relationship.”
Five years ago just mentioning prenuptial agreements was enough to start an argument, but people today are much more pragmatic about these things, Weaver says.
“Increasingly, people have seen what happens in high-profile cases and they realise it is far more publicly acceptable to be upfront about what they brought into a relationship.
“I say to people that if you can draw up a binding financial agreement, then you will probably find it is much easier to talk about a lot of other more delicate financial matters,” Weaver says.
Changes to the law relating to binding financial agreements (BFA) between spouses and de-facto parties have been made to make them easier to enter into and more binding. The reforms will operate retrospectively, so it will affect those people who have already entered into a BFA.
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Divorce and separation are as real and certain as death and taxes. Everyone who is in a relationship or married is anxious at the prospect of divorce or separation. Such fears place stress on couples and this can lead to separation. It is rather circular!