Using Binding Financial Agreements to Protect Your Assets

No one marries with the intention of getting a divorce. However, it’s an unfortunate reality that separations do happen, and it’s important to remain financially protected during such difficult times. This can be achieved by signing a document known in Australia as a Binding Financial Agreement (commonly known as a “prenup” or “prenuptial agreement”).

Read on to learn more about prenuptial and post-nuptial agreements and the factors you’ll need to consider when forming your next financial agreement.

What is a “prenup”?

A prenuptial agreement is a legally binding financial agreement between two people which allows them to retain control over their assets, should their marriage or de facto relationship break down.

Sections 90B–90KA of the Family Law Act 1975 (Cth) deals with financial agreements by parties to a marriage, while sections 90UA–90UN deals with financial agreements by parties to a de facto relationship.

Prenuptial agreements may contain information about:

• Assets and debts;
• Joint and personally owned belongings and assets;
• Spousal maintenance;
• Expectations of any gifts and/or inheritances;
• Insurance coverage;
• How any property will be split; and
• What is covered in each party’s Will in the event of their death.

How are prenups legislated in Australia?

The factors that must be considered when forming a prenuptial agreements are covered under section 90G(1) of the Family Law Act 1975 (Cth). Any agreements formed will only become legally binding if, and only if:

• The agreement is signed by all parties; and
• Before signing the agreement, each spouse party seeks independent legal advice from a legal practitioner about the effect of the prenup on their legal rights; and
• Before signing the agreement, each spouse received a signed statement from a legal practitioner stating that they have received legal advice; and
• The signed statement from the legal practitioner has been served to the other spouse or legal practitioner of the other spouse; and
• The agreement has not been terminated or set aside by the Court.

Why get a prenup?

There are plenty of advantages of signing a prenup:

• Personal autonomy – a prenuptial agreement will ensure that you retain control over your assets and that they do not pass onto your spouse.
• Costs – court fees can sky-rocket into the thousands when settling a divorce matter. Prenuptial agreements will help reduce the financial and emotional strain of future family law proceedings by speeding up litigation, or possibly avoiding it altogether in the event of marriage breakdown.
• Protection – in cases of a second, third or even fourth marriage, a prenup will ensure that that your assets will go to your children rather than your new spouse.
• Transparency & clarity – prenups will ensure that your partner understands the nature of your relationship following a divorce. It will also improve communication with your former partner in relations to which assets they will continue to retain.

However, prenuptial agreements carry with them great uncertainty and can cause great strain on a relationship before the marriage has even begun. Our experienced family lawyers here at JB Solicitors will assess your situation to determine whether prenuptial agreements are right for you.

Children and prenuptial agreements

It is important to recognise any implications that a separation will have on children, or future children, in a prenuptial agreement. Regardless of whether or not you intend to have children over the course of your relationship, it is good practice to mention the possibility of children and how it will affect the property and asset division. If this isn’t mentioned and a child is born, the agreement may be void.

Section 90E of the Family Law Act stipulates that child support may be included in a prenuptial agreement, provided the child has been born and named, and that the exact amount to be paid is listed in the agreement. Of course, the Courts will always consider the best interests of the child and may set aside any agreements that fail to meet this threshold.

When is the right time to sign a prenuptial agreement?

Ideally, a prenuptial agreement should be signed several months before the marriage takes place to reduce complications as your special day approaches. This will ensure that both parties have sufficient time to review and negotiate the terms of the agreement to ensure that a fair and agreeable outcome is made. It will also minimise the risk of the other party claiming that they entered into the agreement on the grounds of unconscionable conduct or undue influence.

Prenuptial vs Post nuptial agreements

Like prenuptial agreements, post-nuptial agreements are a BFA, but are instead made after the wedding. This is legislated under section 90C of the Family Law Act.

Post-nuptial agreements may be appealing to those who failed or simply forgot to sign a prenuptial agreement, which is generally the case for couples caught up in the excitement of planning their wedding and honeymoon.

Alternatively, a party’s financial position may change drastically shortly after the wedding, which may force them to reconsider their monetary relationship with their partner. For example, a large business transaction may not be finalised until after the wedding has taken place. It makes more sense then to have a post-nuptial agreement to ensure that a party may retain sole interest in that transaction.

Are all prenuptial agreements enforceable?

Not all prenuptial agreements are automatically enforceable. The Family Court of Australia can overturn or set aside these agreements if:

• The agreement was obtained by fraud, such as non-disclosure of all assets; or
• The parties did not obtain independent legal advice before signing the prenuptial agreement; or
• There has been a material change to the situation that was not considered before the signing of the prenuptial agreement, such as for the provision of children; or
• One party acted unconscionably or wielded undue influence over the other party when signing the prenuptial agreement.

This is a non-exhaustive list, and the Courts have sole discretion to identify other factors that may be relevant. Should any of these factors reveal themselves, a party has the right to challenge the prenuptial agreement in Court. This may lead to an order:

• For interest payable under the agreement; or
• To award damages; or
• To terminate the agreement; or
• All or part of the agreement is to be enforced by the Court.

Are binding financial agreements still worthwhile?

Recent case study 1: Thorne v Kennedy [2017] HCA 49

This landmark case demonstrates the Court’s strict approach in setting aside binding financial agreements when it has been unconscionably entered into.

Facts:

The parties met on a site to locate potential brides in 2006. Ms Thorne was from Eastern Europe and was living overseas at the time, with no substantial assets, while Mr Kennedy, a divorcee with three adult children, was a Greek-Australian property developer with assets worth between $18-24 million. After 7 months of chatting online, Ms Thorne moved to Sydney to marry Mr Kennedy. However, approximately 11 days before their wedding, Mr Kennedy told Ms Thorne that they were going to see a solicitor about signing a prenuptial agreement, and that the wedding would not go ahead if she did not sign.

However, an independent solicitor advised Ms Thorne that the agreement was drawn solely to protect Mr Kennedy’s interests and that she should not sign it. Ms Thorne understood the advice to be that the agreement was the worst agreement the solicitor had ever seen. She relied on Mr Kennedy for all things and believed that she had no choice but to enter into the agreement.

On 26 September 2007, four days before their wedding, the parties signed the prenuptial agreement. This contained a clause that, within 30 days of signing, a post-nuptial agreement with similar terms would be signed.

On 16 June 2011, less than 4 years into the marriage, the parties separated. Ms Thorne commenced proceedings against Mr Kennedy to set aside the two agreements, a property in the amount of $1.1 million and a lump sum spousal maintenance order of $104,000.

Mr Kennedy passed away in May 2014 and was represented in Court by the trustees and executors of his estate, which were his two adult children.

The Trial Judge’s decision

The Federal Circuit Court of Australia allowed Ms Thorne’s application, finding that she was powerless when entering the prenuptial agreement. Their Honours identified six key factors, beyond mere financial inequality, to demonstrate that she had no choice but to enter the contract, these being:

1. The lack of financial equality between herself and Mr Kennedy; and
2. Her lack of permanent status in Australia at the time; and
3. Her reliance on Mr Kennedy for all things; and
4. Her emotional connectedness to their relationship and the prospect of motherhood; and
5. Her emotional preparedness for marriage; and
6. The ‘publicness’ of her upcoming marriage.

The same factors were also considered when setting aside the post-nuptial agreement, as it was seen as an extension of the original prenuptial agreement.

The Full Court’s decision

The executors and trustees of Mr Kennedy’s estate appealed to the Full Court of the Family Court and were successful in finding that there was no unconscionable conduct or undue influence in either the prenuptial or post-nuptial agreement.

The High Court’s decision

On appeal to the High Court of Australia, Chief Justice Kiefel, and Justices Bell, Gageler, Keane and Edelman found that the agreements were void based on unconscionable conduct, under section 90K of the Family Law Act. The agreements may have also been made void due to undue influence.

Their Honours outlined six key considerations to set aside the agreements:

1. The agreements were not subject to negotiation between the parties; and
2. The emotional circumstances in which the agreement was entered, including any explicit or implicit threat to end a marriage or to end an engagement; and
3. There was little time for Ms Thorne to undergo careful consideration; and
4. The nature of the parties’ relationship; and
5. The relative financial positions of the parties; and
6. The independent advice that was received and whether there was time to reflect on that advice.

Effectively, Ms Thorne’s powerlessness and inability to do anything besides sign the agreements demonstrated that Mr Kennedy acted unconscionably and wielded undue influence over her decisions. The unreasonableness of the agreements was exacerbated by the urgency and the pressure of the upcoming wedding, and that the wedding would not have gone ahead, had she refused to agree to his terms.

Thorne v Kennedy amassed great media attention and cast doubt as to whether binding financial agreements still held up in Court. The recent case of Frederick & Frederick [2018] FCCA 1694 provides some insight as to how future Courts dealt with this question.

Recent case study 2: Frederick & Frederick [2018] FCCA 1694

In this case, Ms Frederick sought to set aside a binding financial agreement due to four key reasons:

1. She understood limited English; and
2. She never saw the financial agreement; and
3. She was forced to sign the agreement; and
4. The circumstances of their relationship had changed, and the agreement did not consider how the parents was to raise their autistic child.

However, the Court rejected these arguments and stated that the agreement was to remain in place for four key reasons:

1. The agreement met the criteria under section 90G, specifically that it was signed by both parties, had not been terminated or set aside, and met the requirement that each party received independent legal advice.
2. There was insufficient evidence to suggest that Ms Frederick did not understand the terms of the agreement, and that the legal advice she received did not explain its effect.
3. The contract was not vitiated by undue influence, as there was evidence demonstrating that improved terms were negotiated against resistance by her husband, and that Ms Frederick knew of amendments and accepted them; and
4. The contract was not vitiated by unconscionable conduct as Ms Frederick in fact understood English and was able to form the view that the financial agreement gave her some protection. Her options were not eliminated or severely confined like they were in Thorne.

Despite their differing outcomes, the cases of Thorne and Frederick demonstrate that there are prenuptial agreements must abide by the legal requirements contained in section 90G. Binding financial agreements are still a viable option for those looking to protect their assets – it simply must be performed within the parameters of the law, well-drafted and performed in a timely manner for them to remain in place.

Let us help you with your family law matter

If you’re seeking to create a prenuptial or post-nuptial agreement with your spouse, or need assistance with any other family law matter, it’s time to find a reliable and experienced family lawyer.

Here at JB Solicitors, we’ll make the process as pain-free as possible. We have fixed-free pricing for family law, giving you a clear sense of the costs from the start and will be sure to help you out every step of the way.

With years of experience under our belt, we pride ourselves in making each client’s family law experience as positive as possible.

Contact JB Solicitors to get started on your binding financial agreement, or for assistance with any other legal matter.