Binding Financial Agreements. What are they? Do I need one?
A Binding Financial Agreement (“Financial Agreement or BFA”) allows married or defacto couples to agree in writing how their property would be distributed between them if they separate or if they have already separated.
What are the benefits of a binding financial agreement?
A BFA can:
- make clear what the initial and ongoing financial contributions are between you and your partner.
- avoid family in fighting between your partner and other members of you family such as your children from a prior marriage or your parents.
- avoid disputes between you and your partner which could arise as to the value of the property you each have at the commencement of your marriage or relationship.
- be useful where one partner expects to receive say an inheritance, a gift from their family or a compensation payment, to ensure that these are taken into account at the time of a separation.
- be useful where one partner has children from a previous marriage or relationship and wants to protect their inheritance.
- take into account substantial gifts made by one partner to another in the event of a separation.
- promote better communication between you and your partner and show that you do not have secrets between you.
- enable speedier resolution of financial arrangements between you and your partner at the end of marriage or relationship.
What should a binding financial agreement include?
A financial agreement should cover all the financial arrangements between you and your partner including:
- Dividing property and other financial resources;
- Spousal maintenance paid by one partner to another.
It cannot cover maintenance of a party who is not able to support themselves without an income tested pension or benefit at the time the agreement takes effect.
In Western Australia married couples can split their superannuation through a BFA but not defacto couples.
It is not necessary for a financial agreement to deal with all of a couple’s property and only has to deal with part of it but this approach is not recommended.
This is because a Court may take into account what property is to be retained by a party under the terms of the agreement in considering the future needs of each of the parties and how the remaining assets should be divided.
What is property?
Property is almost anything which can be valued and usually includes real estate, bank accounts, shares, cars and household items. It can also include a business, a life insurance policy, an inheritance or a compensation claim.
What is spousal maintenance?
Spousal maintenance is a payment which is made by one partner to another who is in greater financial need to provide for their support.
It can be made either as a lump sum or by way of a regular periodic payment. It can be included in a BFA, but must specify a person to whom it is paid to and also the amount.
You can agree in a BFA that no maintenance will be payable.
What is a defacto relationship?
In family law, a defacto relationship is where you are living together as if you were husband and wife on a genuine domestic basis.
Under the Family Court Act, a defacto relationship includes a same sex couple.
In determining whether a defacto relationship exists between two people, numerous factors need to be considered, although none are by themselves essential to decide whether it is a defacto relationship. These include the following:
- Length of the relationship;
- Whether the partners are living together;
- Whether there is a sexual relationship between the parties;
- The degree of financial dependence and any arrangements for financial support;
- The ownership of property;
- The degree of mutual commitment by the partners to a shared life;
- Whether the partners care for and support children;
- How the relationship is perceived by others.
Living together is enough to allow you to enter into a BFA. It can be made either before, during or after you were living together.
What can’t a binding financial agreement include?
It cannot include parenting arrangements, such as with which parent a child will live or what times a parent will spend with a child. However, these arrangements can be the subject of a separate agreement known as a Parenting Plan.
Child support is not included in a Binding Financial Agreement. However, there are similar agreements known as Child Support Agreements and Binding Child Support Agreements.
A BFA also can’t determine how the parties will deal with property which is acquired after the marriage or relationship has ended. It can only deal with what is there at the time that the agreement is entered into or during the course of the marriage or the defacto relationship.
What is needed to be a binding financial agreement?
The financial agreement must be in writing. It must be signed by all parties, but only after each party was given independent legal advice about their rights and the advantages and disadvantages of the agreement.
Each party must receive a statement from the lawyer for each party confirming that the independent legal advice was provided.
Both parties must make full disclosure of all their financial circumstances. Failure to provide disclosure can cause the BFA to be set aside by the Court.
Is a lawyer necessary?
Yes. Each party must have a lawyer to provide independent legal advice as to whether they should enter into a financial agreement. Binding Financial Agreements are a complex document and they must comply strictly with the relevant legislation.
In what circumstances can a binding financial agreement be set aside?
A binding financial agreement can be set aside in certain limited circumstances, either where the agreement does not comply with the requirements of the relevant legislation or the law which applies to the agreement generally. In particular:
- Circumstances which arise after the agreement is made which make it impractical for part or all of the agreement to be acted on.
- If you and your partner agree to terminate the agreement or enter into a new financial agreement.
- If either you or your partner does not disclose full and accurate details of your financial position.
- The agreement is for an improper purpose such as trying to defeat creditors.
- There has been a change in circumstances such as a child and a party to the agreement will suffer hardship if the agreement is not set aside.
- If a party to the agreement engaged in unconscionable or improper conduct.
- The agreement raises issues which can apply to agreements generally such as lack of certainty, mistake, duress or misrepresentation.
What options are available other than a binding financial agreement?
In the absence of a BFA there are three options available in the event of a separation:
The first is to come to an informal agreement between you without seeking Court orders. This can lead to some uncertainty as one partner can always apply to the Court in the future notwithstanding you may have reached an agreement with your partner. However, there are some time limits which generally apply to applications to the Court. For married couples, there is a time limit of one year after a divorce takes effect. For defacto couples it is two years following a separation. However, time can be extended if the Court can be satisfied that hardship would otherwise be caused. Another issue may be that there could be stamp duty or capital gains tax issues which could arise where the transfer is not documented through a Binding Financial Agreement or Court Order.
The second option is to come to an agreement which can be formalised by a Court as Consent Orders. It is not necessary to attend Court for any hearings. Consent Orders are obtained by completing an application form which can be obtained from the Family Court or from their web site online. The Court will independently assess the merits of the application and confirm that it is fair to both parties. This is different from a Binding Financial Agreement where you can contract out of what a Court may consider fair according to principles under the Family Law Act. Defacto couples must satisfy the Court that they have either been living together on a genuine domestic basis for at least two years, there is a child of the relationship or that there are other special circumstances why the Court must make orders in their case. These threshold requirements do not apply to defacto couples who have a Binding Financial Agreement.
The third option is to file an application in the Family Court for property proceedings. A Court must first be satisfied that it would be appropriate, or what is known as “just and equitable” to make orders for property settlement and if so then consider the value of property of the parties, the contributions which each party has made and any other relevant factors relating to the future needs and circumstances of the parties.
A Court will order a party to maintain the other if the following is found to be the case:
- First mentioned party is able to do so; and
- The second mentioned party is unable to support himself or herself adequately.
All the financial circumstances of the parties will be taken into account in determining and if so to what extent spousal maintenance will have to be paid. This includes the age and health of the parties, employment and living expenses.
For married couples, an application for spousal maintenance must be made within a year of the divorce taking effect or in the case of defacto couples, two years following separation. These time limits can be extended if the Court can be satisfied that it would cause hardship if time was not extended.
What do I do if I want to enter into a binding financial agreement?
First you should discuss the proposal with your partner as soon as possible.
The next step is to fully disclose your assets and financial circumstances to each other.
Both parties should then obtain their own independent legal advice as to the effect of a financial agreement on their rights and the advantages and disadvantages of making the agreement.
For more information on or assistance in creating and entering into a binding financial agreement contact our today!
The contents of this publication are not legal advice to anybody who receives it and should not be treated as legal advice. You should not take any action following reading this publication without legal advice concerning its application or relevance to your own circumstances.
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