Binding Financial Agreements – What are they and why should you get one?
We have all heard about ‘Pre-Nups’ in American movies and reality TV shows of the rich and famous, but what are they and are they applicable to the average person?
In Australia, a ‘pre-nup’ is a Binding Financial Agreement entered into before marriage. Binding Financial Agreements however can be entered into at various stages of a relationship, including after the relationship has ended, and can be entered into by people who are married, in a de facto relationship, or divorced.
Overall, a Binding Financial Agreement deals with your property in circumstances where you and your partner separate. Effectively, a Binding Financial Agreement excludes the Family Court from dealing with your financial matters in the event the relationship breaks down, as you and your partner have come to an agreement that your financial matters will be dealt with in accordance with the Binding Financial Agreement you have signed.
Parties often seek to enter into a Binding Financial Agreement after the breakdown of their relationship so they can finalise property matters without going to Court.
A common misconception however is that a Binding Financial Agreement in circumstances where a couple are not separated is only beneficial where there are significant and valuable assets – think Beyonce and Jay-Z. However, this is not the case.
Entering into a Binding Financial Agreements during a relationship can be a powerful financial planning and asset protection tool, as it can stipulate how the parties’ financial matters are to be dealt with in the event the relationship breakdown and protect the future financial stability of both parties. Some reasons why a couple might decide to enter a Binding Financial Agreement include:
- There are assets one or both of the parties accumulated prior to the relationship that they want to protect and maintain as their separate property, such as a house.
- There is debt accumulated by one or both parties and the other party does not want to be liable for that debt should the relationship break down.
- One or both parties have received a gift, inheritance, or windfall that is intended for their sole use and benefit.
- Negotiating and agreeing upon how your financial matters are to be dealt with can avoid disagreement and protracted, expensive negotiations after a separation when emotions can be high.
- Protecting a party’s interest in a business or partnership.
It is therefore important to think about the hard work you have put into becoming financially stable and healthy and what could occur if you entered a relationship with someone and that relationship broke down. Further, the breakdown of a relationship can have significant consequences for a business or partnership.
There are strict legislative requirements for Binding Financial Agreements, with lack of compliance putting the Agreement at risk of being set aside. It is therefore extremely important that a Binding Financial Agreement is drafted by a lawyer who specialises in Family Law.
Whilst these conversations with your partner might be awkward and not very romantic, they could save you both a lot of stress, time and money in the future should your relationship come to an end. You and your partner each need to seek independent legal advice, however we can all work together with your financial planner to ensure that the Agreement works in with your overall financial plan, and acts as a safety net in your asset management plan.