What is a binding financial agreement, and who should consider getting one?
With about a third of marriages now ending in divorce in Australia, including the breakup of de facto relationships, many couples choose to operate separate bank accounts and keep the majority of their finances separate. This can help people feel autonomy over their own finances, reduce fighting over money, and have the freedom to spend their own money in a way they see fit. This is particularly true to people who have already been married or in a long term relationship. However, it provides limited protection in the event of a split, as property and other assets held in the name of one partner can be claimed by the other.
Under Australian law, de facto couples who separate after two years have the same rights as married couples with respect to property settlements; including spouse maintenance and claims on each other’s super. Due to accumulating superannuation and rising house prices, many people now bring significant assets to a new relationship that they want to protect.
Australian Institute of Family Studies research has measured the impact of a relationship breakdown on people’s finances. Of course men can be worse off, but more often divorce has a substantial negative effect on the incomes of women, with women experiencing a fall in income of 21 per cent compared with their pre-divorce income. Because Australia is a “no fault” divorce jurisdiction, there is no financial punishment for having an affair or walking out, though the Family Law Act does have power to consider domestic violence.
There is a way that you can protect yourself and your financial contribution in the event that the relationship breaks down.
Binding Financial Agreement
A Binding Financial Agreement is an agreement between two or more people that is compliant with the Family Law Act 1975.
Binding Financial Agreements cover the division of property between the parties, superannuation and/or spousal maintenance so that in the event of the relationship breaking down, the parties don’t need to go to court or come to a difficult agreement about the division of their property.
A Financial Agreement can be entered in to at different stages of the relationship:
- Before entering marriage;
- Before entering a de facto relationship;
- During a marriage;
- During a de facto relationship;
- After divorce; or
- After a breakdown of a de facto relationship.
A financial agreement is only considered binding by the court if the following conditions are met:
(a) the agreement is signed by all parties; and
(b) before signing the agreement, each spouse party was provided with independent legal advice about the advantages and disadvantages of entering into the agreement and the effect this may have on their individual rights
In other words, you cannot enter into a binding financial agreement without each party obtaining independent legal advice.
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A financial agreement is not registered with a court. It is intended to be a binding and enforceable agreement between the parties only.
Given that the court does not review and confirm a financial agreement before it is entered into by the parties, there are stringent requirements about parties receiving independent legal advice before they sign a financial agreement and requirements set down in the Family Law Act 1975 (Cth) about how a financial agreement should be created and recorded.
A Court May Set Aside a Binding Financial Agreement
A Binding Financial Agreement (BFA) can be set aside by a court if:
1. there is evidence of fraud (this could include a failure to disclose assets or liabilities at the time the agreement was made).
2. the agreement was entered into solely for the purpose to defraud or defeat a creditor or was entered into with reckless disregard to a creditor’s interests.
3. one party is experiencing hardship due to the agreement or in relation to a child of the parties.
4. the agreement is found to be void or unenforceable. This could be due to mistake, public policy, misrepresentation, one party was under duress at the time of execution, there has been a breach of the agreement or unconscionable conduct.
5. the agreement is deemed to be impractical due to a change in one or both of the party’s circumstances.
Equally, even if a Binding Financial Agreement did not comply with all the technical legislative requirements, the court has the discretion to declare it binding on the parties where overturning the agreement would be unjust and inequitable (pursuant to section 90G(1A(c)).
Given the complexity of blended families and new relationships, a binding financial agreement may be the best thing that you consider, even if it does feel like you’re preparing for a breakup. A financial agreement can deal with the issues of inheritances, gifts, pre-existing debts, and family money flowing from grandparents to grandchildren.
The alternative to a financial agreement is Consent Orders given by the court. However, these are limited. Consent Orders can only resolve the division of property after the relationship has ended. You cannot obtain Consent Orders prior to or during a marriage or de facto relationship.
Consent Orders are filed in the Family Court of Australia and are intended to end the financial affairs between parties once and for all.
The bottom line is to document as much as possible.
Financial agreements have a bad reputation in Australia, but this is due to being poorly drafted. To be valid, financial agreements must be drawn up by lawyers or they may be overturned by a court.
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There is a false economy in believing that the expense of having a lawyer draw up a financial agreement is too high, because it could be a drop in the ocean compared with the assets at stake, the costs of legal proceedings in the absence of an agreement and the extra emotional turmoil that entails.
We can help you draw up a binding financial agreement, taking into account your personal requirements and plan for the future. Please contact us to speak to one of our friendly and experienced family lawyers – we offer a free, 10-minute phone consultation.