Protecting your client’s assets

You have a good job that pays well and you’ve accumulated some assets, even if only in the form of superannuation. Your first marriage ended some years ago and your children have started their careers.

Now you’re contemplating a second marriage but want to protect yourself, your assets and your children just in case this one fails too.

Or, you may be contemplating marrying for the first time and have accumulated some assets and want to protect them. How do you secure that protection?

Sound like one (or possibly more) of your clients?

For some people, the answer lies in binding financial agreements (BFAs), known colloquially as pre-nuptial agreements. These agreements — which a couple can make at any time before, during or after marriage — are becoming increasingly popular because they are, as the title suggests, binding.

Only in the rarest of circumstances will the Family Court ignore or depart from the contents of a BFA. So, in almost every case, the BFA your client enters into is the one that will dictate what happens to assets and how much maintenance your client will pay or receive, if any, if the marriage fails.

Until about three years ago, the Family Court paid little heed to pre-nuptial agreements. That changed when the Federal Government amended the Family Law Act so married couples could make their own arrangements about dividing property and paying maintenance.

Today, the Family Court will not ignore, alter or set aside a BFA if it has been entered into properly, unless it believes you or your spouse failed to disclose relevant financial information or one of you signed the agreement under duress. There are some other circumstances that can lead to a BFA being ignored by the court but these are limited.

What makes these agreements attractive is that they give married couples greater control over their own affairs. That results in greater certainty about how things will be shared if the marriage breaks down.

In essence, a BFA ensures you are not exposed to the vagaries of the Family Court system and the enormous delays, stresses, uncertainties and expenses that Family Court litigation inevitably generates.

So far, so good — but reaching the point where both parties are happy to sign a BFA is not always straightforward. The process requires both your client and their fiancee or spouse to fully disclose their financial circumstances.

This can take time to prepare and some people find it difficult to share so many ‘secrets’ involving their financial affairs.

Some think an agreement gives the marriage a negative start, suggests a lack of trust in the other partner or indicates a lack of confidence in the marriage itself.

In some cases, the objections are about the agreement ‘removing the romance’ or one party being treated unfairly.

However, given Australia’s increasing divorce rate and the even higher failure rate of second and subsequent marriages, it makes sense to put the cards on the table and sort out potentially contentious issues either before tying the knot or at sometime afterwards.

Once a BFA is entered into, it cannot be amended. It can, however, be terminated if both the husband and the wife make a written agreement to that effect.

For the wealthier spouse (often the husband), what appeared at the outset to have been an appropriate and reasonable settlement in his wife’s favour may, upon divorce, prove to be overly generous or inappropriate.

This may happen if the wealthier spouse’s financial circumstances deteriorate or the other spouse’s financial circumstances improve dramatically.

In such cases, the Family Court will not intervene to ensure that fairness prevails — both parties would have to abide by the agreement into which they entered.

Unlike a matter that might be litigated in the Family Court where the judge has to come to a decision that is fair to both parties, a BFA does not need to be ‘fair and equitable’. If the agreement is heavily weighted in favour of one party, the agreement will stand, as long as it meets the requirements of the Act and there is no evidence of fraud or duress.

A big positive if your client is considering such an agreement is that BFAs do not have to be approved by the court.

However, as a safeguard, a BFA cannot be entered into unless both parties have obtained their own independent legal advice.

One of the shortcomings of BFAs is that they don’t enjoy capital gains tax (CGT) rollover relief.

So, if a husband transfers an investment property to his spouse, for example, because that is what the BFA requires him to do, this can trigger a CGT liability.

By contrast, in a ‘normal’ property settlement sanctioned by Family Court orders, upon the transfer of an investment property a clause would be included in which the wife (in this case) indemnifies her husband against a CGT liability.

On the other hand, property transactions under a BFA, unlike those made pursuant to a Family Court order, may be protected if the person making the transfer is later bankrupted.

And, if your client or the client’s spouse dies, the BFA remains in force and is binding on the deceased spouse’s executor.

So, if your client wants a specific part of the agreement to cease on death, this has to be specifically written into the agreement.

BFAs do not apply to heterosexual or same-sex couples living in de facto relationships. Such couples can order their affairs, to some degree, by using ‘cohabitation’ agreements. These are intended to serve the same purpose as BFAs but are not binding.

You can’t buy a BFA ‘off the shelf’. It has to be drafted to suit your client’s particular circumstances. A BFA is less appropriate to young couples who have few assets and are marrying for the first time and are rarely sought in such instances.

But if your client is remarrying, or if they are planning to walk down the aisle for the first time and have worked hard to acquire some assets, and they want to know for sure where they’ll be financially if that marriage is dissolved, BFAs are certainly worth investigating.

John Mazzotta is a family law specialist with Melbourne law firm Lander & Rogers.