Understanding Binding Financial Agreements: A Comprehensive Guide for Couples

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You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

A Binding Financial Agreement can be a powerful way of protecting assets when a relationship breaks down.

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However, when done poorly, they're vulnerable to being challenged or set aside entirely.

Today we're going to unpack when financial agreements help, when they create risk, and what questions should be considered when drafting one.

Today I'm joined by Tom Jenkins. Tom is an associate in Velocity Legal's Family Law team.

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Welcome to the show, Tom.

Thanks for having me, Andrew.

Now Tom, a fair bit of your practice is dealing with high-stakes, high-net-wealth disputes. How often do Binding Financial Agreements come up in your practice?

0:51
Every day, yeah. It's just a staple of modern family law life, the Binding Financial Agreement. Exceptionally popular, and they are one of the two ways you can settle a financial settlement.

So yeah, all the time.

Yeah, yeah. So I guess let's start with the basics.

1:09
They're colloquially, at least in the States, called prenups. Does anyone call them prenups in Australia?

That's what, you know, when I'm speaking to financial advisers or accountants, they bring it up.

And I'm not sure about the law in America, but there is the perception in America that prenups aren't effective.

1:29
And I think that's sort of been imported here, although it's not quite accurate.

Yeah. And so I understand with Binding Financial Agreements though, they aren't necessarily just prenups because they can be done at different times. Is that correct?

Yeah. So they can be done before, during and after.

1:47
And that timing really matters because they apply to both marriages and de facto relationships.

And everyone knows when they're not married, but when you're in a de facto relationship, it's a bit less clear.

And a lot of people these days are electing not to get married. Some people never get married, but it doesn't take too long to be in a de facto relationship.

2:06
So people need to be quite careful about that.

So I think starting point, what is the benefit of a financial agreement as opposed to just not doing one?

So the real benefit of a financial agreement is, for your average person without a financial agreement, your property settlement with your partner when you separate will be dictated by the provisions in the Family Law Act.

2:32
And that's a certain formula of a kind, although it's very discretionary. That'll be done in accordance with your contributions, your future needs and what's just and equitable, based on essentially what the Act thinks should happen.

2:51
If you do a financial agreement, you get to decide how your property is divided in the event of a separation.

And as you hinted earlier, you can decide that at the start of your relationship, during, or even at the end if you don't want to have to go through the court system.

Well, before we get to what should go into those, I want to just delve into this whole concept of, are they enforceable?

3:14
Are they not? Because that seems to be a massive issue. If it's not enforceable, what's the point in doing it, I guess?

Are they enforceable, and how should you approach the task?

Yeah, well, they're definitely enforceable.

3:29
If you're entering into a financial agreement, you should assume this is how it's going to play out.

Definitely don't bank on the hope that it will be set aside. And normally, unless something's gone wrong, and there's a variety of ways that could happen, it will be enforced.

3:47
The starting point is essentially the solicitor to do the right job in drafting it, but things can happen afterwards which could have the effect of nullifying the agreement.

So when it's the solicitor's fault, that tends to be bad drafting. So they are like contracts, and under the Family Law Act, the Family Law Act actually imports the principles of law and equity into the enforceability of these agreements.

4:14
So when you think about what would set aside a contract, those kind of principles can also set aside a financial agreement.

For example, your parents give you a property in Hawthorn, your financial agreement says, well, when we separate, 50% goes to you, 50% goes to me.

4:31
But five years later the house burns down, and then ten years later all your assets are completely different.

Well, that's going to be frustrated. So that agreement could be set aside based on impracticality.

It can also be unenforceable based on uncertainty of the terms.

4:50
If there are multiple readings of how it can happen and no one can decide objectively, then that could be set aside.

And that's quite common. That's what leads to a lot of negligence claims against solicitors.

You've also got fraud.

5:06
If one person hasn't disclosed all of their assets and that's material, then that's quite common.

Not a solicitor problem as such, that's more of a client problem.

If it's a sham to defraud creditors, that can be set aside.

Common situation, just one example, you're about to go bankrupt, you enter a financial agreement with your wife to give her everything, and then you go bankrupt.

5:29
And the trustee in bankruptcy in that scenario can seek to set aside the agreement based on that kind of fraud.

What about your sort of unequal, let's just say, two people coming together. One has more assets than the other. Maybe one's older than the other.

5:46
They're not coming in on an equal footing. Presumably that's not enough alone?

No, just sort of unequal positions. No, it's not strictly relevant.

And just quickly, the other things which could set aside an agreement, you're thinking unconscionable conduct, duress and a material change of circumstances relating to a child.

6:10
But where the inequity that you've just mentioned comes into account is in the duress.

So if you've got two people where there is a pretty extreme disparity, to the extent where one person doesn't feel like they have a choice to enter into it.

6:26
And there are a lot of factors that can go into that.

But generally, just because, say, your partner's on 500 grand, you're on 50 grand, and they've got a bunch of assets and you don't, that on its own isn't grounds to set aside the agreement.

Although I always suggest to clients, just because you can get away with an inequitable agreement doesn't mean you should.

6:47
Because if someone feels like they've been truly screwed, then they tend to try to set it aside.

But if the agreement's good for you, but not outrageous, often people will accept that outcome because if you try to set aside an agreement, you could get lawyers.

If the other side doesn't agree, you have to go to court.

7:04
You can have a trial over the whole issue and it's expensive.

So if it's something they can live with, that's often a better decision to make rather than just getting every dollar you can.

Yeah, yeah, yeah. Because it's sort of like that situation, if it's quite extreme, they might say that they've got not much to lose by going hard, as opposed to if it's a bit more even.

100%.

7:28
Yeah, really interesting.

I mean, I've heard the stories about Binding Financial Agreements being provided before the wedding, and the wedding's going to be called off. But presumably those type of things would go into duress.

I agree, that's duress. And that's why it's generally best practice not to do it before a wedding, even if you've got a wedding day that people have been invited to, because often that goes to the embarrassment.

7:58
Because imagine you've got a wedding and all your friends and family are going to come and then all of a sudden it's been called off.

So the main case about that is Thorne and Kennedy.

And in that scenario, she was from overseas, brought the family over, and 10 days beforehand she's handed an agreement.

8:16
Has it explained. But in that case, it wasn't just the timing.

There were a lot of things that went into that. She didn't speak English, she had no money, was entirely reliant upon him.

And it's not just the timing because in that case, she signed an agreement beforehand and also afterwards. He had to sign two agreements.

8:38
So we'll sign one now, but to make sure you don't feel like you were pressured because of the wedding, we'll sign a new agreement to replace the old agreement a few weeks later.

But in that scenario, I think the husband was outside the law firm, took her to the appointment, was calling her during the appointment.

8:54
And again, I think he was worth $20 million, she was worth nothing. So there was a lot that went into that case.

So it's not as if you enter into an agreement close to your wedding, it will be set aside. That's not a given at all.

It's one of many factors you'll consider.

9:12
Yeah. So if you had two weeks before the wedding, but the other person didn't have any family that they cared about, they were an educated person on a similar income and similar wealth to you, maybe in those circumstances the wedding timing wouldn't make a difference.

Yeah, that's really interesting.

I wanted to turn to what are the terms that you commonly see?

9:30
What are the sort of things that are commonly negotiated or put in a Binding Financial Agreement?

Yeah. So probably the most common financial agreement structure is the concept of joint and separate property, and that's prenuptial, before the marriage or de facto relationship.

9:47
So it essentially goes, well, everything in my name is in my name. Everything in your name is in your name.

When we separate, everything in my name will be mine. Everything that's in your name will be yours.

And they'll have some accommodation of how the joint property is divided.

Yeah. So things that are generated during the relationship, or maybe it's not quite generated during the relationship, but things that are owned jointly.

10:10
Well, yeah, I think most of the time it's property or joint accounts which are in joint names.

But some people do it as financial contribution. So anything I apply for, my earned income will be mine. Anything you apply for, your income will be yours.

It's not always ideal because that creates issues of enforceability, like how do you record it?

10:30
And the agreements can contain provision for, say, receipt procedure and gifts and a ledger and that kind of thing.

But then you've got to be very careful for your whole relationship to make sure you're actually following it, because if you don't, it becomes an issue of practicality then, and it could affect the viability of the whole agreement.

10:48
Yeah, interesting.

Do you often see formulas or sliding scales or things like that? As you said, what's mine is mine, what's yours is yours when you come in.

But situations change over time, and particularly with children or the duration of the relationship. Is that something that you see, that it can change over time?

11:07
Yeah, definitely.

And it's exceptionally common, especially if someone's going to take time off work to care for children.

They're sacrificing their earning capacity for the benefit of the family.

11:23
And in that scenario, they often request, and it makes sense, that depending on how many kids they have, their payment might go up or their percentage might go up.

And depending on how long the relationship goes, the amount of assets they retain will also increase.

Because that might make sense. You meet someone, you might be worth $1 million, they're worth nothing.

11:39
When you've been dating for a few years, that matters a lot to you. But if you've been together for 30 years, well, it might not matter so much.

And in that circumstance, people might consider it fair that a more equitable settlement occurs.

11:54
Yeah, yeah. I could see the BFA as being a really good tool, particularly in the sort of second marriage or blended scenarios where people are a bit older, they're coming in with a bit more.

Is that the most common situation you see Binding Financial Agreements?

12:13
Probably not the most, but it is important because if you've got kids of a previous relationship, you want to preserve your assets for them ideally, and you don't want to lose a lot of it in a family law dispute.

Whereas if you're younger and you don't even have any assets to protect, if you're younger and you're expecting an inheritance, that might make sense to protect that.

12:32
But if you're not expecting any windfalls, then you're essentially just segregating your relationship from the onset.

And if you were entering into a financial agreement based on that separate property model, you have to live your entire life like that.

And if you've got 100 bucks and she's got 100 bucks, it doesn't really make as much sense.

12:48
And it's not a financial consideration, but it is a disadvantage.

One disadvantage of the financial agreements is they create angst. If you're 20 years old and you put this agreement in place from the get-go, you're not starting the relationship from a place of trust.

13:10
No.

And that is a matter for the parties, but it is an issue.

Yeah.

Well, you mentioned it, but that sort of inheritance or that intergenerational wealth, maybe there's a family trust. How do you deal with those issues?

13:26
Let's say one party's coming in and either they've got an inheritance or are expecting one, or they're somewhat associated with some family trust that's got a lot of money in it.

How do you deal with those situations, and should you deal with those as part of a Binding Financial Agreement?

Yeah, I think a Binding Financial Agreement is probably the best way of protecting that asset.

13:47
Because it can be, you can include in the terms to separate it off or give yourself a greater loading of the overall asset pool.

And what's great about it is it actually shows a common intention to protect it at the time.

So what people often try and do to protect these kind of things is they might enter into a loan agreement with their parents and they say, well, it's not really an inheritance or it's not really a gift.

14:10
It's a loan and you need to pay us back. But everyone kind of knows that that's not the case.

No one's expecting to be repaid unless you're going to get separated, or even worse, years after the funds are forwarded, they might come up with a loan and say, oh, it was actually a loan the whole time.

14:27
Whereas, of course, the other party goes, well, no, we're never going to pay it back.

And then you're in the Family Court spending a lot of money fighting over these loan agreements.

Whereas if you do a financial agreement, everyone's signing a document which basically says, we understand this as an inheritance, but it's going to be protected.

14:44
And each person gets legal advice about that.

So there's less dispute about what everyone intended, and then you've got a legally enforceable document to sequester it off.

That becomes more difficult, of course, if you're 10 years into a relationship and you get an inheritance, having a partner then sign up to that will be trickier.

15:03
So you can do a Binding Financial Agreement over one asset, or less than everything, that's correct, isn't it?

Yeah, you can. Again, the main issue would be if you're going to do whatever that one asset, you need to make sure it's preserved, which can be difficult if it's liquid, if it's $1 million, unless you're just going to keep it in a bank account.

15:25
And of course you can say any accretions or increases in value on that or tracing, but it can be difficult the longer your relationship goes on.

And that's why sometimes specific provisions requiring that amount to be paid back to you at separation, or for you to get a larger percentage of the overall asset pool, can be preferable.

15:48
Yeah, yeah.

I wanted to just go to process and drafting financial, getting one signed up. How long does it take?

I know these things can drag out sometimes, but typically, what's the process? How do you go from having nothing to having an agreement in place, and how long would it take?

16:13
Yeah. Well, in theory, it could all be done in a matter of days, because often they're quite standard form contracts.

And then you amend those contracts based on the needs of the parties.

So it doesn't take too long to draft.

But ideally it should take a few weeks to a month, so everyone's got time to read it, understand the terms, iron out any issues, have it proofread by a colleague.

16:40
Because if you just hand someone a financial agreement, even the other party, if you just hand them the agreement and say sign, then that's normally going to, that could give rise to allegations of duress or they're not understanding or not getting the requisite legal advice.

So it's good to give everyone some time. And also for the solicitor's perspective, if you don't give yourself time to understand it or you make a mistake, then that leads to personal liability for you.

17:04
Yeah. So best to take your time.

Take your time, make sure everybody has time to understand it, agrees, isn't pressured and signs off.

Another question somewhat related is in some areas of law, you have online templates you can go and download, will kits, things like that.

17:24
Is there any of that in this space?

I imagine it's fraught with danger, but I wanted to get your views and perspectives on online providers, if they exist, and what perils there might be.

Yeah, unfortunately they do exist.

17:40
And the financial agreements, although for a family lawyer we're pretty familiar with them and their common terms, they are quite technical and easy to mess up.

So if you get a pro forma financial agreement and do it yourself, you can have issues of, say, fraud, because a self-represented person might not put in all their assets or sufficiently identify those assets.

18:05
They might say, well, I've got house X and suburb B, but who owns them? Is it a trust? Is it through a company?

Yeah, who's on title and that kind of thing, which a non-lawyer might not think to include.

And then you've got issues of the terms being conflicting, which can lead to it being set aside.

18:23
So a whole raft of issues.

And ultimately, it's a legal requirement to get independent legal advice.

So you're going to have to get a lawyer involved anyway, and it can only be more costly because it's much harder to fix an extremely defective agreement as opposed to just doing it properly to begin with.

18:41
Yes, yeah, yep.

Another one from left field I'm going to ask, as a percentage, we're talking about legal fees here, the cost of doing a Binding Financial Agreement versus the cost of your average family law dispute.

What do you think it is?

18:58
It's quite a drop in the ocean compared to.

Yeah, it's not even comparable.

You're probably looking at the low thousands of dollars, whereas a family law dispute is how long is a piece of string.

How many hearings do you have to do? Is it litigious? Is it going to settle early?

19:15
So the financial agreement, one of the main benefits is it can just save you from the whole property family law process.

Tom, we've been talking about Binding Financial Agreements.

We've covered what they are, when you might consider using one and some of the things to consider when drafting them, making sure they're enforceable and the benefit in having one when the alternative is the open world of family law and formulas and discretions and court processes and legal fees and so forth.

19:50
I wanted to thank you for being part of this discussion.

It's been very insightful.

My takeaway from this is that these could be really effective tools in giving some certainty and also managing risk.

20:07
But you've got to be careful.

You've got to make sure you do it right, make sure the drafting's good, make sure it's clear, and make sure that it couldn't be set aside for some sort of reason.

So if you're considering putting in place a financial agreement or you've already got one and want to see if it's actually going to stand up, I encourage you to reach out to Tom in our Family Law team at Velocity Legal for coordinated advice.

20:37
Thank you for having me.

Thank you.