If you’re considering marriage and looking at a way to protect your assets, you may have come across the terms ‘prenups’ and ‘binding financial agreements’. But what are these terms and what’s the difference?
Technically, there is no difference. A ‘prenup’ is the most commonly used term but has no legal standing. The correct legal term is a ‘binding financial agreement’.
In this guide, we’ll shed some light on using these terms and whether they make any difference in Australian family law.
What are prenups or pre-nuptial agreements?
Everyone has heard of the term prenups or pre-nuptial agreements, largely because of the myriad of US law shows on our screens here in Australia.
So, while it is not a legal term in the real sense of the law, many lawyers and clients in Australia may refer to it out of sheer familiarity. By definition in the name alone, a couple typically enters into a prenup before a marriage or de facto relationship. A de facto relationship is established when two people have a relationship and choose to live together but are not legally married. A couple must fulfil certain criteria to claim a de facto relationship.
However, we’ve now established that prenups are binding financial agreements and not separate legal documents.
What are binding financial agreements (BFAs)?
On the other hand, a binding financial agreement (though less familiar with clients) is the correct legal term and will be binding in the court of law. So, what are binding financial agreements? They detail the financial arrangements between two parties in case of a relationship breakdown, covering issues such as property, business assets, child custody, spouse maintenance, financial resources, inheritances, debts and more.
Binding financial agreements have been part of the Australian legal landscape since December 2000 to avoid uncertainty and the stress of court – giving couples better control over their financial matters. When executed properly following all legal advice and procedures, they become binding in the court and can be a useful tool when planning for the future. A BFA can be created before, during, or after a marriage or de facto relationship.
Generally, it is created to protect the party who may either be substantially wealthier, may need to protect their children’s inheritance from a previous relationship, or for some other reason. Both parties must obtain independent legal advice and sign the agreement in the presence of legal counsel.
What is the process of setting up a binding financial agreement?
It is important to get binding financial agreements legally right, or it can be challenged by the court, which has happened on several occasions due to several reasons, such as having inadequate time to review, signing under duress, and so forth. Each party must have the opportunity to negotiate and get independent legal advice to protect their rights. While there is a cost for binding financial agreements, it has often proven to be much more affordable than the cost of a court battle.
Decide whether it suits your situation
BFAs are not for everyone. Some couples may not need to go down this route at all. The first step is to decide whether it suits your situation or not. Typically, this suits situations where one person is significantly wealthier than the other; has certain business interests; or has a blended family.
Establish whether you need the BFA reviewed or drafted
The next step is establishing whether you need to have the BFA reviewed or drafted. This will depend on your situation, whether you choose to initiate the BFA to protect your assets or whether your partner decides to do so.
Get independent legal advice
Regardless of whether you want the BFA drafted or reviewed, seeking independent legal advice is mandatory under Australian law to ensure the financial agreement is ‘binding’.
Signing the BFA
Once the financial agreement is drawn up, reviewed and agreed upon by both parties, they must sign in the presence of their respective lawyers. Certificates of advice from each party’s lawyer should also be inserted into the agreement.
Making copies of the BFA
One person usually keeps the original signed agreement, while the other keeps the copy. You may choose to give a copy to someone for proof that the agreement exists, but this is your choice.
Changing circumstances usually warrant periodic reviews of the BFA. These may include new properties and assets, children, family member death, inheritances, and more so the BFA remains relevant.
Situations that may require binding financial agreements
While it’s not the most romantic topic, discussing financial matters and potential separation can be essential for safeguarding both your interests. As a general guide, BFAs are ideal for couples where one has significant wealth or a prior family and may want to protect their interests. Here are some situations where a binding financial agreement may prove invaluable:
Blended family through marriage
Couples who have children from previous relationships and are entering into a new marriage or de facto relationship can use a BFA to clarify financial and asset arrangements – providing more certainty around children’s inheritances and minimising the risk of disputes in the future.
Wealth disparity between a couple
When one individual has significant wealth compared to the other, either through business, financial or property, they may choose to enter into a binding financial agreement to protect their interests.
Couples getting married
A BFA can be used by couples who intend to marry or enter into a de facto relationship to outline how their assets, liabilities, and financial resources would be divided in the event of separation or divorce.
Financial situation changes while married
While married, one individual may come into significant wealth through inheritance or some other way. They may choose to go the BFA route to protect their financial future.
BFAs are valuable when couples are estate planning, ensuring certain assets and inheritances remain separate and not subject to division. BFAs can clearly define financial arrangements and reduce conflicts if the relationship breaks down.
What is the enforceability of a binding financial agreement?
A financial agreement does not need to be lodged in court to be binding. It comes into force usually when a couple is going through a divorce.
However, it must meet certain technical conditions in sections 90G for marriages and 90UJ for de facto relationships in the Family Law Act 1975. In some circumstances, the court also has the power to set them aside, specified in section 90K for marriages and 90UM for de facto relationships.
Australian legislation does not refer to ‘prenups’ as a legal term, so for all intents and purposes, a binding financial agreement is a way for you and your partner to formalise assets.
A BFA is extremely beneficial with the right legal advice and guidance from a trusted family lawyer. As one of the most experienced Hills District family lawyers, Arcadian Legal has drafted and reviewed hundreds of financial agreements for our clients. We are committed to helping protect your interests at all times.
Planning a future together can be incredibly exciting but also a little daunting. Let us help make the process easier for you with our compassionate service for drafting and reviewing binding financial agreements.
Keep in mind that divorce lawyers and child custody lawyers may be needed in different circumstances, while a legal representative who specialises in binding financial agreements may suit this particular situation. Contact Arcadian Legal for assistance with any family law matter.