The role of BFAs in modern relationships

A Guide for Couples Protecting Their Future

Gone are the days where “pre-nup” is a dirty word. Now, people are more financially-minded, are entering into relationships older and with established careers, and more so than in the past, people are receiving early inheritances from their family to boost their chances of entering into a difficult property market.

With these societal changes comes an increased need for asset protection and planning.

One such tool is a pre-nup (in Australia called a Binding Financial Agreement, or BFA). As reported in the Canberra times, BFAs are on the rise. Here, we explain what exactly a BFA is and why it can be a smart asset protection tool in this day and age.

What is a Binding Financial Agreement?

A Binding Financial Agreement (BFA) is an agreement entered into by a couple about how their property, financial resources, superannuation, and spousal maintenance will be divided if they separate.

A BFA can be entered into:

Before parties marry or commence a de facto relationship
Often called a “prenup”.
During a marriage or de facto relationship
Sometimes used to update arrangements, create certainty or protect assets/inheritances.
After separation or divorce
To formalise a financial settlement without involving the court.

Why consider a BFA?

If parties separate without a BFA and cannot agree on how to divide their finances, they face the possibility of a costly and time consuming legal battle where a Judge will eventually decide their fate. We have all heard the horror stories about the Family Law system costing parties their life savings in legal fees and taking years to resolve a dispute. While that’s not the case for most matters (and is something most good Family Lawyers will actively try and avoid), that is a reality many people involved in Family Law litigation face.

When involved in litigation, the legislation requires all existing assets and liabilities of the parties to be considered in a property settlement including those acquired. This means that the parties cannot “exclude” certain assets from consideration, even if those assets were owned before the parties met, purchased after separation or if they were passed down from one party’s family; effectively everything is “up for grabs”.

Even for the couples that can manage to agree on the outcome, the Court still has to approve Consent Orders . This means that even if things are amicable, the Court holds the ultimate authority as to what a property settlement will entail. If the Court is not happy with a particular outcome or it does not align with the principles adopted by the Court, it can decline to make the Orders.

For many, the lack of authority over their own financial separation is a concern.

A BFA effectively lets parties “contract out” of the Family Law system and take control over their own outcome. They will decide what will happen if they separate and this does not necessarily need to be guided by the rules and principles of the Court. In doing this, the parties have much more flexibility about how they will manage their finances in the case of separation. For example, couples can agree to exclude certain assets from the property pool, or can agree to assets being divided in a certain way. This can be particularly beneficial for people who are interested in protecting family money, businesses and trusts; or for anyone who wants to plan for certainty about separation without the inevitable emotional toll that comes with separation.

BFAs are not about “planning for divorce” or doubting the stability of a relationship; they are a smart financial planning tool for modern relationships that can be entered into when the parties are thinking logically and clearly. BFAs should be drafted with the intent of protection, risk management, clarity, transparency and peace of mind; not conflict. A BFA is about taking care of each other and managing the worst case scenario now rather than post-separation.

Any large investment you make should be coupled with insurance (e.g. your house, car etc.) A relationship is no different and should be approached with the mindset of protecting both parties in the event of the unthinkable.

Is a BFA suitable for me?

BFAs are suitable for most people entering into, or in, a relationship. In particular, they are useful for people who:

Have a high net worth or high income earning potential
Are entering into a relationship with assets
Are entering into a relationship with the expectation of being a “stay at home parent” to support the other’s career
Want certainty and a well-thought out plan in the event of a relationship breakdown
Want increased control over how assets will be divided instead of leaving it to a Judge
Have significant personal or family wealth
Own a business
Have children from previous relationships
Want to protect current or future inheritances
Are in, or entering into, a second or subsequent long-term relationship
Are entering into a relationship later in life

Another benefit of a BFA is the element of discretion. Because a BFA is not bound by the rigid rules of the Court, parties can be more flexible about the terms and can contractually obligate each other to privacy about their financial affairs. This is important for high net wealth individuals and those who may be impacted by the spread of their private information.

What can a BFA cover?

A Binding Financial Agreement may include:

Division of property and assets
Allocation of debts and liabilities
Treatment of superannuation
Spousal maintenance arrangements or waivers
Ownership of business interests
Financial arrangements during the relationship
Treatment of future inheritances or gifts

Requirements for a Valid BFA

For a BFA to be legally binding:

Both parties must receive competent independent legal advice
- About the effect of the agreement
- About the advantages and disadvantages of making it
- Their legal rights.
Lawyers must provide signed statements confirming this advice.
The agreement must be signed by both parties.
There must be no fraud, duress, or undue influence in entering into the agreement.
The agreement must comply with the Family Law Act 1975.