What is the difference between a prenuptial agreement, a binding financial agreement, a financial agreement, a prenup and a BFA in Australia?
1. What is a binding financial agreement or prenuptial agreement?
A binding financial agreement or prenuptial agreement is sometimes referred to as BFA.
They are becoming increasingly more common in Australia. We prepare and review BFAs regularly.
In simple terms, a binding financial agreement allows parties to enter a binding agreement to divide their assets at separation. They are a contract between one person and their partner setting out their agreement for financial separation in the event of a breakdown of their marriage or de facto relationship. To the extent it is considered valid, the family court will then enforce the agreement. In other words, the parties cannot apply to the family courts to seek a property settlement or spousal maintenance that is contrary to the terms of the agreement signed by the parties.
BFAs provide peace of mind and protection for new couples before saying “I do” or entering into a new de facto relationship. They are an indispensable tool for financial and succession planning.
2. What is a prenuptial agreement?
In Australia, prenuptial agreements are binding financial agreements entered before the commencement of the marriage or de facto relationship.
BFAs are often mistakenly referred to as a prenuptial agreement or a prenup.
Prenuptial agreements are an American concept. A prenuptial agreement (or ‘prenups’ or ‘prenup’ as they are sometimes called) is made before the parties are married.
There is no concept of prenuptial agreements or prenups in Australia. The legislation deliberately do not make any reference to the phrase “prenuptial” to draw the distinction that binding financial agreements are a completely different concept.
Many people still refer to binding financial agreements as prenuptial agreements or prenups.
3. When can parties enter a BFA?
A prenuptial agreement must be entered before the marriage or relationship commences. A binding financial agreement can be made before the marriage or de facto relationship commences.
However, a BFA can also be drawn up when couples are settled in a marriage or de facto relationship or even after the breakdown of a marriage or de facto relationship. This is the primary reason why it is incorrect to refer to a binding financial agreement as prenuptial agreement. A binding financial agreement can been entered after the date of marriage and even after the date of separation.
4. Who can enter a financial agreement or prenuptial agreement?
Both married and de facto couples can enter a BFA. It is been some time since de facto couples received the same rights as married couples. They can enter BFAs now too. Of course same-sex couples can also enter a BFA.
5. What can a financial agreement or prenuptial agreement say?
A BFA can deal with all the financial matters between the parties. It can specify the division of property and superannuation. It can also make provision for spousal maintenance. The principal purpose of a BFA is limit exclude or exclude one for the parties making a claim against the other party in the family courts.
6. When should you consider getting a financial agreement or prenuptial agreement?
You should consider preparing a BFA if you answer positively to any of the following questions:
- Have you been previously divorced or separated?
- Do you own your own real estate?
- Do you own significant other assets?
- Have you received any significant gifts from your parents?
- Are you likely to receive any significant gifts or inheritances in the future?
- Are you a beneficiary of a trust of your parents?
- Do you have children from a previous relationship?
- Do you have a reasonably good income earning capacity?
- Have you reached an agreement about how you want to divide the assets after separation?
7. What legislation applies?
Part VIIIA of the Family Law Act 1975 (Cth) is where you will find the legislative provisions for binding financial agreements for married couples. Part 5A Division 3 of the Family Court Act 1997 (WA) for de facto couples in Western Australia. Part VIIIAB Division 4 of the Family Law Act 1975 (Cth) for de facto couples in other States and Territories.
8. When will a binding financial agreement be binding?
In summary a BFA is binding if:
- the agreement is signed by both parties; and
- the agreement contains, in relation to each party to the agreement, a statement to the effect that the party to whom the statement relates has been provided, before the agreement was signed by him or her with independent legal advice from a legal practitioner as to the following matters —
- the effect of the agreement on the rights of that party; and
- the advantages and disadvantages, at the time that the advice was provided, to the party of making the agreement; and
- the annexure to the agreement contains a certificate signed by the person providing the independent legal advice stating that the advice was provided; and
- the agreement has not been set aside by a court; and
- after the agreement is signed, the original agreement is given to one of the parties and a copy is given to the other.
Upon the mutual signing, the binding financial agreement will come into effect and is legally binding, unless the agreement expressly states that it will come into effect at a later date.
9. How binding is a binding financial agreement? Do binding financial agreements work?
Once a binding financial agreement is legally binding a party cannot simply change their mind, depart from the terms of the binding financial agreement or set aside the binding financial agreement.
Even if a party to the binding financial agreement passes away, the binding financial agreement will continue to operate and be binding on that person’s representative.
In order to set aside a binding financial agreement, a party must apply to the court to set aside the financial agreement.
Setting aside a financial agreement can only be ordered in limited circumstances. The Court may make an order setting aside the Agreement if, and only if the Court is satisfied that:
- if there has been a failure to disclose relevant matters (such as an asset, interest in a trust, or a real estate valuation; or
- if the Agreement was obtained by fraud or duress; or
- if the Agreement is uncertain or incomplete or has been obtained by undue influence, misrepresentations, mistake, fraud, or other contractual irregularities;
- a party to the agreement entered into the agreement:
- for the purpose, or for purposes that included the purpose of, defrauding or defeating a creditor or creditors of the party; or
- with reckless disregard of the interest of a creditor or creditors of the party; or
- the agreement is void, voidable or unenforceable; or
- in the circumstances that have arisen since the agreement was made it is impractical for the agreement or part of the agreement to be carried out; or
- since the making of the agreement a material change in circumstances has occurred (being circumstances related to the care, welfare and development of a child of the de facto relationship) and as a result of the change the child or, if the applicant has caring responsibility of the child, a party to the agreement will suffer hardship if the Court does not set the agreement aside; or
- in respect of the making of a financial agreement or former financial agreement, a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable.
10. Do you need a lawyer to prepare a binding financial agreement?
For good reason, a binding financial agreement cannot be entered into hastily or as a last minute decision.
To enter into a valid agreement, parties will need the involvement of 2 experienced and independent family law lawyers.
Drafting a binding financial agreement that will withstand future challenge is a complicated task and the lawyers must have an extensive knowledge of all the technical requirements.
There have been a number of cases that show the problems that can arise if BFAs are not prepared properly.
When negotiating terms of a financial agreement to deal with spousal maintenance you should be aware that 90F of the Family Law Act 1975 and 205ZR of the Family Court Act 1997 provides that any provision in a financial agreement that purports to exclude or limit maintenance payments can be ineffective if at the time of the agreement coming into effect the receiving party was unable to support themselves.
Once the terms of the financial agreement are agreed and drafted into the correct form each party must obtain independent legal advice.
Both parties must receive independent legal advice about the effect of the agreement on their rights and the advantages and disadvantages of entering the financial agreement.
Each of the parties’ independent legal advisers will then complete a certificate of advice and this will form part of the agreement.
The discretion of the courts to set aside a binding financial agreement is reasonably wide. Therefore, parties and their family lawyers to a binding financial agreement must be careful when preparing and entering into a binding financial agreement. You cannot ‘cut corners’ when preparing a binding financial agreement.
11. Can you change your mind?
If the parties wish to terminate, alter or replace their BFA this can be done by mutual agreement. If this is the case the parties will have to enter into a new financial agreement or a termination agreement. Both of these carry the same formalities and technical requirements of the original BFA.
12. What happens if you do not comply with a BFA or prenuptial agreement?
If either party breaches a term of a binding financial agreement, then the other party can apply to the family courts to enforce the binding finding financial agreement. The family courts can assist to enforce the terms of the financial agreement as if they were orders of the court.
13. What are the advantages of a BFA or prenup?
Some advantages of entering into a financial agreement is having certainly and control over your future financial position, privacy from the usual court process and freedom to do things on the agreed terms. Financial agreements can be helpful in promoting an amicable and reasonably fast division of assets and liabilities after a breakdown of a relationship. If there is no BFA in place, then either party can rely on their family law rights to apply to the family courts. Without a BFA, and without an amicable agreement, then their financial future is uncertain, because the family courts a large discretion in financial cases.
14. What are the limitations of BFA?
Binding financial agreements are not without their faults. Some of the disadvantages of financial agreements include their inability to cater for unforeseeable changes in circumstances, their ability to be set aside (if a circumstance is proved) and the possibility of contractual disputes arising.
15. How much does a binding financial agreement or prenuptial agreement cost?
We provide fixed fees for the drafting a BFA. Telephone us to arrange a 15 minute free consultation or a reduced fee initial consultation to discuss what is involved in preparing a binding financial agreement or prenuptial agreement and what they may cost. Not sure if you need a lawyer? Then read our about your family law rights.
16. What other information is available or should you consider?
It may be more appropriate to do consent orders rather than a BFA. Read a full write up about consent orders.
You can also find a range of useful information on the family courts website.