With the most recent data released by the Australian Bureau of Statistics reporting that 47,638 divorces were granted in Australia in 2013, it is interesting to take a look at the current thinking around pre-nups and asset protection when entering into the most emotionally fraught of contracts – whether it is you who is contemplating marriage or your children, friends or siblings who are taking the step down the aisle, at any stage in life.
In this article I address two of the most commonly raised questions:
Do pre-nups work? and
How do I help my kids financially without exposing the money in the event of a divorce?
What is a Binding Financial Agreement (Pre-Nuptial Agreement)?
A Binding Financial Agreement is an agreement between de facto, soon to be married or already married couples, which is made either before, during or after their relationship. The Binding Financial Agreement states how your assets, financial resources and liabilities will be divided if your relationship breaks down. Binding Financial Agreements, though much more common in the US, have been around for about 10 years in Australia.
Binding Financial Agreements are Agreements provided for under the Family Law Act. The purpose is to allow the parties to enter into a private contract that does not require the Family Court’s approval.
When entering into one of these Agreements, both parties must have their own independent legal advice. You must be sure that you are obtaining the right advice so that you are not wasting your time and money in entering into an Agreement that will not hold up against a challenge. The validity of a Binding Financial Agreement can be challenged in a Family Court and the Court has over-thrown some for the reason that “circumstances have changed”.
Where the purpose of the legislation was to allow parties to enter into private contracts, the Family Court is becoming more creative in finding ways that an Agreement has not complied with legislation, so that the Court may step in and protect a party that has entered into an unfair Agreement.
A publicised example of the importance for strict compliance with legal and technical requirements is the case of Australian Olympic Champion Grant Hackett. On 31 December 2012 news broke that Grant Hackett was suing his lawyer as a result of a faulty Binding Financial Agreement. This Agreement was entered into prior to his marriage to Candice Alley. The statement of claim alleges the 2007 financial agreement was drafted in a way that did not comply with legislative requirements. Hackett also claimed he was not told that each party was required to have independent legal advice.
Other circumstances that can result in the Agreement being overturned include: fraud by either party (for example, incomplete financial disclosure by either party), unconscionable behaviour by either party, the Agreement being used to evade creditors, and either party failing to obtain independent legal advice prior to signing the Agreement.
Do pre-nups work?
Society has changed a lot in terms of the expectations of marriage – men and women are going into marriages feeling like they want an equitable relationship. Many, although not necessarily all, couples whose marriages break down are able to successfully move on with their lives, and those with children often renegotiate their post-divorce relationship in positive ways. Nevertheless, there are major social, emotional and financial implications for separating and divorcing couples.
It makes sense to discuss expectations and make a record of these at the onset and to continue to talk about these as the marriage evolves, families change and work changes. There have been some issues with Binding Financial Agreements as individuals, couples, lawyers and the Family Court have come to terms with them – nevertheless they are worth considering as a mechanism for creating some degree of certainty in an uncertain and complex world.
How do I help my kids buy a house without exposing the money in a divorce?
The unaffordability of Sydney housing is a major cause of concern for first home buyers and their parents. If you want to give the newly-weds a helping hand to buy a house, there are steps you can take to protect your gift.
There are a number of issues to consider when deciding to buy a house for your children:
- The mechanism by which to provide the funds: an outright gift, a loan, buy the house in your name, have some form of charge over the property such as a mortgage.
- Are any of the beneficiaries of the gift exposed to personal or business risk? For instance, are any of the intended beneficiaries involved in professions which may result in them being sued?
- Protecting the asset from the interests of creditors, excess taxes, spendthrift or unscrupulous family members, and family law considerations.
Parents wanting to help their children buy their first home and minimise potential risk, can choose to lend the money. Purely “giving” an amount for the deposit or enough to fund the full purchase price of the property runs the risk of a transfer of wealth out of the family in the event of separation or divorce in the future. This is because the asset, whether it is cash or property, becomes an asset counted by the Family Court in the event of a divorce. For that reason you could see more than 50 per cent of the gift ending up in the hands of your ex-son-or-daughter-in-law.
Treating the money given as a loan is a good option for parents to help their children financially without exposing the money if the marriage breaks down. For this to be effective the loan must be formalised:
- The loan must be properly drawn up and signed by all parties, setting out the terms of the loan, interest payable and the mode of repayment.
- Use a Binding Financial Agreement, signed by the couple, to remove doubt as to the existence of the loan and how it is to be treated in the event of a relationship breakdown.
- Have some form of charge over the property, such as a mortgage.
Binding Financial Agreements as an asset protection strategy
It is possible for a couple to financially separate while remaining married. Despite being most commonly referred to as ‘pre-nuptial agreements’ under the Family Law Act, couples can enter into Financial Agreements before, during or after a de facto relationship, before or during a marriage, or after a divorce.
Why would you do this? There are a number of situations which may require particular attention when deciding how to protect assets as part of an asset and estate plan.
The underlying objective is to quarantine assets to ensure that they remain available for distribution as you wish, and are not exposed to the risks of the commercial world, differing needs of family members, unscrupulous family members, or excess tax paid both now and in the future.
None of these arrangements are guaranteed to give you the outcome you desire, as laws constantly evolve and circumstances change. However, it is prudent to consider how to protect your assets throughout all stages of married life and to seek appropriate, independent advice from a financial advisor, accountant and lawyer.