We have talked previously about how the “Bank of Mum and Dad” is an increasing necessity in Australia for parents to enable their children to enter the property market.
There is a risk however when parents advance a large amount of their family wealth to their children. In the event of a marriage or de facto relationship breakdown, the money or assets that have been advanced will be included as an asset for distribution in the joint asset pool.
In Family Law, the court looks at all assets and their current value in each party’s name. The Court can also look behind corporations or trust set ups and include those assets in the asset pool also in certain circumstances. Where money has been advanced to one party to the relationship by their parents, it inevitably ends up benefiting both of them in the event of relationship breakdown.
Luckily, there is a way where gifts can be protected in the event of a relationship breakdown. One option is for the parties to a relationship to enter a Binding Financial Agreement. We will discuss the advantages and disadvantages of these Agreements below.
What is a Binding Financial Agreement?
Parties who agree on issues of division of their property and also spousal maintenance can make a Binding Financial Agreement.
The following couples can enter a Binding Financial Agreement
- De facto couples intending to live in a de facto relationship
- De facto couples living together in a de facto relationship but not separated
- De facto couples who have separated
- Couples who are intending to marry
- Married couples living together but not separated.
- Married couples who have separated but are not divorced.
- Married couples who are divorced.
Think of a Binding Financial Agreement as a contract between two people in a relationship (or who have separated).
When considering asset protection, a Binding Financial Agreement is the only option under family law for couples who are still together (not separated) to record an agreement as to their division of assets in the event of their separation.
What terms can be in a Binding Financial Agreement?
The terms of the Agreement are flexible, but typically they can contain the following:
- Protection of assets one party /spouse introduces (including as a gift from their parents). The Agreement can specify explicitly that the gift advanced remains that party’s sole asset in the event of relationship breakdown.
- Protection of wealth given to a party/ spouse by their parents during a relationship and can cover all future gifts.
- To protect one spouse who enters a relationship with significantly more assets.
- In the case of a second marriage, to ensure children from a first marriage receive their inheritance.
- To preserve generational wealth such as family farms or other businesses.
- To give greater weight to financial contributions from a higher earning spouse or a spouse who owns significant assets than the Court may otherwise recognise.
- Formal recognition of loans from family members where the Court may otherwise find it is not an enforceable loan and treat it as a gift.
- Specifically defining, or in some cases providing a complete waiver, of the right for the spouses to seek spousal maintenance payments against the other.
- Protection of future inheritances one spouse may receive.
What is required for a Binding Financial Agreement?
The Family Law Act 1975 specifies certain legal requirements must be met for a Binding Financial Agreement to be considered legally “binding” on the parties.
The main requirements are as follows:
- The Agreement must be signed by all parties.
- Prior to signing the Agreement each party must receive independent legal advice from a lawyer on the effect of the Agreement on their legal rights under the Family Law Act 1975 and the advantages and disadvantages of the Agreement to that party (at the time the advice was provided).
- There must be a signed certificate provided to the party which is completed by their lawyer that certifies that legal advice was provided in accordance with the requirements of the legislation.
- Each party must receive a copy of that lawyer certificate of independent legal advice for both parties.
The Court has a discretion to declare an Agreement is valid or invalid if these requirements are not met.
What is the effect of the Agreement?
If an Agreement is legally valid then the effect is that the Federal Circuit and Family Court no longer has jurisdiction to determine disputes about the rights the parties have under the Family Law Act.
The Agreement, if valid and in force, remains binding on the estate of a person after they die.
In some circumstances the Court may consider varying or setting aside a Binding Financial Agreement on application by a party to the Court.
The circumstances are the following:
- The Agreement was obtained by fraud (including non-disclosure of a material matter)
- The Agreement was entered into by a party with the intention of defrauding or defeating a creditor, or with reckless disregard to the interests of a creditor.
- The Agreement was entered into for the purpose of defrauding another person who is in a de facto relationship with one of the parties to the Agreement or defeating a possible property settlement claim brought by that person.
- The Agreement is declared void, voidable or unenforceable in accordance with legal principles of contract law.
- In circumstances that have arisen since the Agreement was made it is impracticable for the agreement or part of the agreement to be carried out.
- Since the making of the Agreement a material change of circumstances has occurred relating to the care, welfare and development of a child of the marriage and as a result the child or the person who has caring responsibility for the child will suffer hardship if the Court does not vary or set aside the Agreement.
- In respect of making the Agreement a party to the Agreement engaged in unconscionable conduct.
- There is a payment flag in operation on a superannuation interest overed by the Agreement and no reasonable likelihood the payment flag will be terminated by a flag lifting agreement.
- The Agreement covers a superannuation interest that is unsplittable.
Binding Financial Agreements offer legal protection to parties however it is a complex area of law and legal advice is required to ensure that the Agreement is suited to your needs and properly drafted.
In the event that you would like further advice on Binding Financial Agreements please contact our office.