When clients come to see us about succession and estate planning, they are usually thinking about the contents of their Wills, and other financial-related structures such as Trusts, which they have or are contemplating creating in their lifetime(s) or in their Wills.
Many have not considered the effect of a relationship breakdown on their assets, whether it is their own relationship or that of their children. Such a breakdown and the resulting financial settlement can have a substantial negative effect on the capital accumulated by them during their lifetime.
The only way to ensure that this accumulation of capital is protected is by making a binding financial agreement, before, during or even after the breakdown of a relationship.
What is a binding financial agreement (BFA)?
A BFA is an agreement between parties to a relationship that sets out how their assets are to be dealt with in the event that the relationship irretrievably breaks down. You may be familiar with this type of agreement from American pop culture, which references similar agreements known as “pre-nups”.
In Australia, a BFA does not need to be pre-nuptial, but can take place at any stage of a relationship. It can apply to either married or de facto spouses and be regardless of gender.
When we prepare a BFA, we can tailor it to your specific circumstances. There are a variety of matters that can be dealt with by way of a BFA, including:
- How financial responsibilities (such as living expenses) are shared during your relationship;
- Division of your assets in the event of a relationship breakdown, including:
- What happens to assets acquired by each of you prior to the relationship;
- What happens to assets acquired by each of you during the relationship;
- What happens to assets that you acquire jointly during the relationship;
- Whether assets such as superannuation or expectancies such as inheritances are to be included in the asset ‘pool’ for division;
- Who assumes responsibility for the liabilities you have incurred before or during the relationship, jointly or separately; and
- Spousal maintenance following a relationship breakdown.
Both parties must obtain independent legal advice prior to executing the BFA. Such independent advice not only ensures that the agreement best meets your needs, but is also necessary for the agreement to be admissible before the Family Court.
It is therefore crucial that you see a lawyer to either prepare or provide advice on a BFA and that you do not try to ‘DIY’. If you have been asked to sign a BFA, please contact us before executing any documents so that we can properly advise you.
Why do you need a BFA?
If you are entering into or are already in a relationship and have significant personal assets, we would recommend that you execute a BFA, particularly if your assets are disproportionate to that of your partner. In the absence of such an agreement, the Court may significantly vary the proportion of these assets in the event of your separation. While many believe that a BFA prevents a spouse from ‘taking half’, in reality, the Court can make any order regarding property that it considers just and equitable in the circumstances.
In one English case, where a husband was on a significant income and the wife was responsible for looking after their children, the wife was awarded 90% of the marital asset ‘pool’ in recognition of her contribution to the marriage by raising the children, but also her greatly diminished earning potential and the lifestyle to which she had become accustomed. While this may not be the norm in family law proceedings, in the UK or Australia, it shows that clients may have ‘a lot to lose’ if they do not have a BFA in place.
Why do your children need a BFA?
Most of our clients are looking for an estate plan that preserves the capital base of their wealth for the benefit of future generations. Whilst we can structure your Wills with a Discretionary Testamentary Trust (DTT), a legal structure which can protect your children’s inheritance from future domestic partners, such protection can be strengthened further by your children entering into a BFA.
Your child’s BFA has benefits both before and after your death. If they suffer a relationship breakdown during your lifetime, their expected inheritance can be considered as a potential ‘financial resource’ if the Court deems it relevant. Your child could therefore receive a smaller share of the relationship asset ‘pool’ on the basis of their expectancy (noting that this is not determinative but is one issue the Court may take into account). If your child had a BFA in place, access to this resource would be made much more difficult for the Court to access in the division of assets especially if the BFA further specified that any potential inheritances by either party were not to be considered in such a division.
In terms of your estate planning, the main benefit of such a BFA would occur after your death in protecting your assets from ending up in the ‘pockets’ of your children’s ex-partners. When our office prepares a BFA, we specify that the parties are not to have any claim to the inheritance of the other party under any Will (or benefits under any family trusts), unless specifically instructed otherwise. Such an agreement ensures that even if your children decide to deviate from the DTT structure that your Will establishes and to ‘cash out’ your assets, it will be much more difficult for their spouses (or domestic partners) to have a claim to your accumulated wealth after your death.
While your children’s partner may initially be unwilling to sign a BFA, often on the basis of “don’t you love me? Don’t you trust me?”, we find that both children and their partners are more willing to enter into a BFA when it is presented as a “condition precedent” to receiving their inheritance. Assuming the relationship remains on foot, your children’s spouses will not only enjoy (albeit vicariously) the benefit of that inheritance but also appreciate that it will assist in preserving such inheritance for the benefit of the children of the relationship.
A properly drafted BFA is designed to ‘cover off’ every contingency. We recommend that there is a conference in our office where we, together with our clients, their children and even the children’s partners discuss the benefits of the BFA within the wider estate and succession plan.
Do the above scenarios apply to your and/or your children? If so, it is time to think about the relevance of a BFA, whether the relationship(s) in question are recent in duration or otherwise. We can assist in the preparation of a BFA as a component of a wider estate and succession plan or otherwise. Feel free to contact Tony today to start the conversation.