Think you need a prenup? Understanding binding financial agreements

A third of all marriages in Australia end in divorce. Add to that the number of de facto partners who separate and you begin to understand the vast number of relationship break-ups that routinely reshape the country.

Then consider this: the median age for divorce is about 46 for men and 43 for women, which means these new singles have years of financial history - be it wealth or debt accumulation or something in between - under their belts.

A high number also have children (nearly half of all divorces granted in 2021 were for couples with children younger than 18).

Being in their prime, most of these people are also likely to enter at least one other long-term relationship in their lives. It raises the question: how does the better-off partner protect the wealth they are bringing into a new relationship?

And, importantly, if they are creating a blended family, how do they ensure their financial wishes for their children are respected should anything go awry?

This complex but increasingly common situation has driven the rise of binding financial agreements, once called prenups. So popular are they becoming that Australia's largest family law firm, AF Legal Group, reports a 79% rise in enquiries between 2022 and 2023.

So, what are binding financial agreements and how can they protect you? We spoke to Damira Hidic, practice leader and managing director at Australian Family Lawyers Gold Coast, part of AF Legal, to find out the top 10 things you need to know:

1. What is a binding financial agreement?

It is a contract that outlines the distribution of property and financial resources after a relationship ends.

This can include spousal maintenance.

In Australia, prenuptial agreements (which are primarily known as financial agreements) can be made before, during or after a marriage or de facto relationship.

They can decrease the legal costs that usually follow after a separation, protect businesses, wealth and inheritance rights, make accommodations for spousal support and ensure clear intentions and expectations in marriage or relationships are reflected.

Additionally, they protect assets including pets and a future inheritance, protect you from the other party's debt, and provide certainty and flexibility in the event of separation. This is why having a financial agreement can help improve relationships and trust between partners.

2. When do you need a binding financial agreement?

They are not just for the wealthy - the rising number of Australians in blended families or de facto relationships has triggered greater interest in this type of agreement.

Examples of situations where parties should contemplate having a financial agreement include:

• being in a new relationship where they have recently had a property settlement with their previous partner,
• when they are contemplating purchasing assets together,
• when using their separate property or gift/inheritance received from their parents or relatives to finance a new joint purchase,
• bringing in a significant amount of wealth (business, real property, and so on) into the relationship.

Those who have received, or will receive, an inheritance or a personal injury payout or those who are in a blended family and want to protect their assets/superannuation for the benefit of their children should also seek to put an agreement in place.

They are useful when one party wants to limit the amount of spousal maintenance payable to the other party in the event of a relationship breakdown.

When it comes to intact de facto relationships or marriages, they are useful when issues such as infidelity, addiction and debt have arisen in the relationship and a person wants to try to save the relationship but wants to have financial security in case it does not work out.

3. How do binding financial agreements work? 

Financial agreements promote open conversations about finances and eliminate the need for formal property settlements if a relationship ends.

Before obtaining a financial agreement, it is important to ask your partner in advance and allow sufficient time for them to contemplate the agreement.

Gather all necessary documents related to your financial circumstances, including loans, assets and debts. Consider how assets and liabilities should be handled during the relationship and in case of a breakdown, taking into account the impact of children.

Agreements should outline which items are marital or jointly owned and which will remain separate in the event of a separation. They are only legally binding in Australia if they meet certain requirements.

They must be signed by all parties, who must seek independent legal advice and provide statements from their legal practitioners confirming that they have received independent legal advice before signing the agreement, and they must not have been terminated or set aside by a court.

Each party must have their own lawyer. The average time to finalise an agreement is one to three months.

4. What is the difference between prenup and postnup style financial agreements?

Prenups are entered into before marriage and postnups are entered into after or during the marriage.

The beauty of a financial agreement is that both married and de facto couples can enter into the agreement before or during their relationship.

It is never too late to discuss it with your partner and agree on the assets that each of you will retain in the event of a relationship breakdown.

5. Do people who enter into financial agreements generally agree to keep the wealth proportions they bring into a relationship or do they agree to a split of assets if they separate?

Every relationship is different, and the terms of agreement generally depend on factors such as whether it is a first or second relationship for each party, the wealth of each party, and whether or not there is an intention to have children in the future.

Financial agreements should be fair and reasonable to avoid vulnerability to legal challenges. Parties should consider potential changes in their circumstances and aim for reasonable entitlements throughout their relationship.

An example of the terms that typically feature in agreements is a set-up where each party retains any assets that they bring into the relationship, including any inheritance that may be received during the relationship or provisions are included for a cash payment (usually to the financially weaker party) to be calculated based on an agreed amount for each year that the parties are in the relationship.

Where the agreement is entered into during their relationship, it may provide for specific assets to be retained by each party or a specific percentage of the total value of the assets owned jointly and separately.

6. What assets are typically included?

Any property and financial resource (for example, a future inheritance or an interest in a family trust) can be covered.

These include real property, shares, bank accounts, interests in a business, interests in companies and trusts, superannuation, artwork, furniture, vehicles, collectibles, family heirlooms, current and future inheritance, personal injury payouts and redundancy payouts.

The agreement can quarantine certain assets, such as a family home or a business, and does not have to apply to all assets. It can also specify who owns any existing debt or debt incurred during the relationship.

7. Can financial agreements include unique lifestyle clauses (such as cheating)?

While it may be tempting for some parties to enclose a lifestyle clause, they are not enforceable in Australia and clients are discouraged from including them.

8. Are financial agreements enforceable - do they hold up in court?

They can be challenged in court.

There are various grounds on which they can be set aside by the court, including if they were obtained through fraud or non-disclosure of material information, due to mistakes, uncertainty or incompleteness, duress, undue influence and unconscionable conduct.

They can be considered invalid if circumstances have arisen that make it impracticable to carry out the agreement, there are material changes 
in circumstances relating to the care of a child, or there has been inadequate legal advice.

To minimise the risk of an agreement being set aside, parties need to take care to comply with current legislation and requirements, make full and frank disclosure of assets, liabilities and financial resources, and draft the agreement in consultation with both parties and their legal representatives.

Fairness and equity in provisions, including provisions for children, occupation of the family home and cash settlements are vital to ensuring financial agreements remain enforceable.

Parties must allow sufficient time for preparation and negotiation, and avoid overbearing conduct during negotiation.

Finally, the orderly signing of the financial agreement after compliance with the above matters is critical. Seeking high-quality, independent legal representation for each party will also minimise the risk of having an agreement set aside.

9. What happens in the absence of a financial agreement?

In the absence of a financial agreement, married and de facto couples' property settlement and spousal maintenance entitlements will be decided under the Family Law Act 1975.

The court follows a five-step process to determine a party's entitlement to property adjustment under the Act.

These steps include assessing the just and equitable adjustment of property interests, identifying and valuing all property, considering financial and non-financial contributions, evaluating various factors, such as age and income-earning capacities, and ensuring the proposed order is fair and equitable in the specific case.

The Federal Circuit and Family Court of Australia has a wide discretion when determining the parties' property settlement entitlements and maintenance and the outcomes are uncertain. The proceedings can take more than two years to conclude and can cost thousands of dollars.

10. How much does a financial agreement typically cost?

This will vary depending on the complexity and time required for the legal representatives to draft the agreement and advise their respective clients.

However, it can be relatively low if you and your partner agree to reasonable terms.

If there is a significant financial disparity between the parties, it is not uncommon for the party who arranges to have the agreement drafted to either contribute towards the other party's legal fees or pay the total cost.

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