Binding Financial Agreements [BFAs] – Benefits and Pitfalls
The Family Law Act now allows all people to make agreements at 3 different stages of a relationship:
- Prior to marriage (also known as a ‘Prenuptial Agreement)
- During a marriage (even if the relationship has not yet ended)
- After a divorce.
Did you know that agreements can also be made prior to entering into a defacto relationship, during a defacto relationship and after a defacto relationship has ended?
Helpfully, the legislation also now provides for such agreements to be made by same sex couples.
The advantages entering into a BFA are that they can provide certainty to couples upon separation as to the distribution of their assets. As you can imagine, having a BFA in place is considerably cheaper than later recourse to litigation in the family courts!
However, there are many dangers for the unwary upon entering into such Agreements. In order for them to be legally binding they must meet the strict legal requirements set out in the legislation. For this reason the two parties should only seek the advice of competent family lawyers.
The challenge in drafting BFAs prior to a marriage or a defacto relationship commencing is ensuring that future changes in circumstances are thoroughly considered. Essentially, you need to predict the future!
It is fundamentally important to obtain thorough legal advice on potential issues that may arise within the course of the relationship as they may ultimately vary their financial position from that intended initially.
It is essential that both parties consider the following ‘potential’ issues when entering into a BFA:
i. The subsequent birth of children
ii. The possibility of a temporary separation or reconciliation
iii. Illness or injury to either of the parties or a child of the relationship.
iv. The sad event that one of the parties may die (keeping in mind that the deceased party’s estate can enforce the Agreement).
v. The possibility that assets in existence at the time of the Agreement may not exist at the time of the enforcement of the Agreement or that the values of such assets may have significantly decreased or increased.
vi. Changes to the superannuation of either or both parties.
vii. That either parties may suffer loss of employment or substantial changes in employment and circumstances.
viii. That the parties may have mixed funds in a way that was not envisaged in the Agreement.
It is important to note that BFAs cannot be varied. In the event that a term of a BFA needs to be changed, it is essential to terminate the existing BFA and enter into a new one.
There is no requirement to register BFAs and there can only be one original and one copy made. It is not possible to execute a BFA in counterparts. It is therefore essential that the parties keep these agreements in a very safe place.