I recently presented an information session for Law Week 2018 entitled “Do I need a Pre-Nup? Everything you ever wanted to know about Financial Agreements / Pre-Nuptial Agreements”.
There was a request for the information provided at the session and so I intend to summarise the information provided along with links to assist.
WHAT IS A FINANCIAL AGREEMENT?
In basic terms, it is an agreement between two people entering or already in a de facto relationship or marriage. The agreement will specify what will happen:
- during the relationship; and/or
- at the point of separation; and/or
- after separation
to any assets, liabilities, superannuation, financial resources, inheritances, gifts, windfalls or income of either one or both parties to the relationship.
These can either be held at the time the agreement is entered into, or accrued or earned during the relationship – the agreement can cater for both.
DO I NEED AN AGREEMENT?
If you do not enter into an agreement and you enter a de facto relationship or marriage then all your assets, liabilities, superannuation and income earned during the relationship and potentially after will be deemed relationship property and form the asset pool for division between you and your partner under the Family Law Act 1975. 1
In the simplest of terms, the Family Law Act will divide your asset pool as follows:
- Firstly, all assets, liabilities, superannuation and financial resources in your and your partner’s name or of which you have an interest will form the pool for division between you.
- The pool is divided based on an assessment of contributions and section 75(2) or 90SF factors depending on whether it’s de facto or marriage but they are essentially the same. 2
- Contributions are the financial contributions whether direct or indirect toward the property, non-financial contributions direct or indirect toward the property, contributions towards the welfare of the family including homemaker or parent. Section 79(4) and Section 90SM(4).
- Section 75(2) / section 90SF are long but essentially include reference to the circumstances of the parties to the relationship including their: health, age, income, property, financial resources, income earning capacity, care or control of a child of the relationship, commitment to maintain another child or other person, duration of the relationship and impact upon the parties earning capacity, contribution the party made to the relationship and a standard of living that is reasonable in all the circumstances. 3
- You should also know that section 75(2) and 90SF refer to “the terms of any financial agreement that is binding”. 4
So, in drafting this legislation thought has been given to allowing parties entering or in relationships to come to agreements about how they will divide their assets, liabilities, superannuation and income between them in the event of a separation.
The crux is, if you are already in a de facto relationship or marriage, or you are contemplating entering into one, then you need a financial agreement.
WHEN SHOULD YOU ENTER INTO AN AGREEMENT?
Straight away. Lawyers are risk averse so of course I’m going to say that. But in all seriousness, the best time to enter into any agreement is before you become vulnerable or before the Family Law Act 1975 is applicable to your circumstances and with plenty of time to discuss, negotiate, amend, and importantly for both parties to seek out and follow legal advice that is given to them. This is quite crucial.
So, before you enter a marriage, before you receive an inheritance, gift, early inheritance or monies from family members.
Before you purchase that property you’ve been saving hard for and intend for your wife or partner to live in with you while paying you rent. Before you transfer a property you own into joint names. Before your family transfer property or cash into your name or joint names.
Before you provide your partner or wife with a lump sum of money, contribution towards purchase of property, before you start paying them rent or move into their owned property.
It’s also very important for people that have accrued an asset pool, that are in second marriages or relationships later in life and if you have children that are not part of your relationship. You want to make sure you provide for them in the future.
WHEN IS IT DE FACTO?
De facto relationships are harder to identify than marriages because you don’t have the ceremony or sign a marriage certificate.
- The total period or periods of the relationship is two years (note this includes breaks so one year plus a break plus one year) can be de facto;
- There is a child of the de facto relationship;
- One party made a substantial contribution to the relationship and failure to adjust the property entitlements would result in a serious injustice.
The term substantial contribution is difficult to define but essentially those points I raised earlier when discussing how property is adjusted. It includes financial contributions to property, non-financial contributions to property, contributions to the relationship, care and welfare of children, homemaker, caregiver, that could be viewed as “substantial”. Your lawyer will help you with this definition.
It’s worth noting you can still be in a de facto relationship even if the other person is married or in a de facto relationship.
IT’S A TOUCHY SUBJECT, HOW DO I DISCUSS AN AGREEMENT WITH MY PARTNER?
Carefully. You should be able to have these conversations with somebody you are thinking of spending your future with and having a child with / supporting financially. Given the delicate nature of the conversation your lawyer will be able to refer you to appropriate practitioners that are able to assist you with these conversations and negotiations to make sure it all stays positive and mature and future focused.
You want to discuss things such as:
- what happens if we have children,
- what happens to my inheritance if we separate,
- what happens to the property I brought into the relationship,
- will we divide everything equally between us if we separate or will we come up with another formula for dividing everything up in a way we think is fair.
- It may even be as simple as including that any assets in a family trust or belonging to your parents are excluded and quarantined and won’t be subject to an assessment under the Family Law Act, while everything else will be.
Your lawyer will help you with this so get legal advice before you start these conversations.
WHAT CAN YOU INCLUDE IN AN AGREEMENT?
You include who gets what and how.
You can and should include how you wish to deal with the assets, liabilities, superannuation and resources of both parties to the relationship in the event you separate.
This includes houses, bank accounts, stock, trusts, businesses, mortgages, credit cards, HECS debts, and even maintenance payments between one person and the other. It can be either an asset-by-asset approach, quarantine or a specified percentage.
This can include those you already have within your possession, or those that you may or will accrue in the future.
Inheritances and gifts can also be included. Assets that your partner might believe belong to you but do not, that are in a family trust, or belong to your parents, this includes a property you rent from your parents, this includes a family business that you work in.
You want to think about what might happen if your partner makes a claim on this asset, this business, this income.
Maintenance can also be included. Maintenance is payable in summary when one party to a relationship has an excess of income over expenses, while the other has an excess of expenses over income.
What you are essentially trying to achieve is a specified agreement that will precisely and with the most amount of certainty possible contract you out of the provisions of the Family Law Act 1975.
HOW DO I MAKE SURE THAT THE AGREEMENT HOLDS UP?
You both need to obtain independent legal advice and you need to follow it.
You need to make sure that you start discussions early and that there is no threat that the relationship won’t “continue” if the agreement isn’t signed. It should be a conversation or negotiation and not an ultimatum.
Both people need to be entering into the agreement of their own free will and have the option not to agree if they don’t want to. If there’s an imbalance of power or a significant imbalance in resources you could be in trouble – get advice and follow it.
You should not enter into an agreement close to a wedding date, birth of a child or settlement of a property, or any other significant life event. Start the conversation early.
You should also make sure the agreement is fair, if it is unjustly unfair, such that a lawyer would not recommend one of you enter it, then it might not hold up. Follow your lawyers drafting advice. If you have an asset and your partner gets advice that the agreement is unfair and they should not sign it while your lawyer is telling you to get pen to paper as soon as possible, you have a problem – get advice about how to ensure that the agreement will be viewed as fair so it will be upheld.
One trap to be mindful of is if you intend to have children, you would need to ensure your lawyer include an adequate provision so that both parties have adequate means to support themselves and any children of the relationship.
CAN I JUST DO A FAMILY TRUST INSTEAD?
No, you can’t. To be perfectly clear, if you transfer property into a trust you control and you are a beneficiary it’s going to be treated as relationship property so there’s no point bothering.
If you have a family trust, as in your parents have a trust and you’re either a trustee or beneficiary then yes, get an agreement, ensure that you know the specifics of this trust and provide this information to your lawyer, that your partner is aware of it and that perhaps all you seek to do is limit your exposure or risk in the event your relationship ends.
Now I’m not saying that your partner will be successful in claiming assets that are in a family trust of which you have no control or interest, but the risk is what’s crucial here.
If your former partner does not know about the specifics and files an application in court, you’ll be looking at a starting payment of $10,000 to a good lawyer and anywhere up to $200,000 in legal fees.
The point is to try to make sure that no proceedings are ever issued in your matter so the threat of proceedings and legal fees does not exist.
WHAT ABOUT DURING THE RELATIONSHIP OR MARRIAGE IF CIRCUMSTANCES CHANGE?
It is important to note that you can enter into an agreement before you enter a de facto relationship, during a de facto relationship, before a marriage or during a marriage. So, you can look to amend and change your agreement if your circumstances change.
If something changes – if you inherit, if your parents want to gift you a property or lump sum in cash, if you anticipated or didn’t anticipate having children and that changes – get advice and do another agreement.
DO I NEED A LAWYER?
Both parties to the agreement must obtain independent legal advice. This advice will include the effect of the agreement on your rights and the advantages and disadvantages of entering into the agreement.
Just remember, a good lawyer will be able to provide you with advice as to your situation and how to make sure the agreement, or an agreement will hold up. You may not have the agreement drafted 100% the way you want it, but that’s far better than the other outcome, where the agreement is set aside by a court and you are subjected to the Family Law Act interpretation in its entirety.