Divorce and separation: should I consider a prenup or binding financial agreement?

— 8 min read

As difficult as divorce and separation may be to contemplate when your relationship is going well, we cannot deny that they are in more common than may be appreciated given that 40 percent of marriages in Australia end in divorce 1.  As a medical professional, you will likely accumulate significant wealth throughout the course of your career, and should the unfortunate event of a relationship breakdown occur, you will eventually have to reach a property settlement with your spouse or partner.

For couples who at the time of cohabitation own the equivalent value of assets, and equally contribute to the accumulation of future assets, then a property settlement is a reasonably straightforward exercise of equally dividing these assets at the time of separation. However, this scenario is not common.

More often than not, one partner brings greater assets to the relationship and/or income earning capacity. This usually means that one partner financially contributes far more than the other during the relationship.

As a medical professional with a high income earning capacity, you need to be aware that if your marriage/relationship breaks down, your separating partner may be legally entitled to keep more than 50% of any wealth you have accumulated at the time of separation. This includes all property, financial resources and/or business interests held personally or beneficially (e.g. unit/discretionary/hybrid trusts).

If separating couples have children together, then any settlement will have to be adjusted to take into consideration the children’s needs. The law is ultimately concerned with fairness and ensuring separating couples receive what is just and equitable considering all the relevant circumstances.

What is a Binding Financial Agreement or BFA?

The Family Law Act 1975 (Cth) allows couples to enter into a Binding Financial Agreement (BFA) (sometimes referred to as “prenup”) at three distinct stages:

  • before the marriage/relationship,
  • during the marriage/relationship, or
  • after separation.

The purpose of a BFA is to document how all or any of the property and/or financial resources of separating couples are dealt with in the event of a marriage/relationship breakdown. It is important to note that a BFA does not need to be just and equitable to be binding 2.

For example, a BFA can ensure that couples retain their separate property and financial resources (as held in their own names), while dividing any jointly owned property in accordance with their respective contributions. It can also exclude the jurisdiction of the Family Court of Australia for either party to make an application in relation to spousal maintenance 3.

Advantages of having or making a BFA

A BFA can have several advantages:

  • it provides for how personal and jointly owned property and financial resources will be dealt with in the event of marriage/relationship breakdown;
  • it reduces the risk of lengthy and costly litigation;
  • it prevents parties from applying to the Family Court for property settlement or spousal maintenance; and
  • it provides the terms of any future property settlement.

Circumstances in which a BFA can be set aside

The Family Court retains wide powers and discretion to set aside a BFA in certain specific circumstances, such as: fraud, contractual unenforceability, material change in circumstances, impracticality, and unconscionability.

The recent High Court case of Thorne v Kennedy [2017] HCA 49 considered the doctrines of duress, undue influence and unconscionable conduct in the context of an application to set aside a BFA. In this decision, the High Court found that because the relevant circumstances gave rise to a “special disadvantage”. The BFA should be set aside for the following reasons:

  • the BFA was offered as being ‘not subject to negotiation’;
  • the emotional circumstances put undue pressure on the weaker party because the BFA was signed so close to the wedding; and
  • while independent legal advice was given, there was no time to reflect on that advice.

It is important that parties are given a reasonable amount of time to review, amend and reflect upon any BFA, as well as the opportunity to obtain independent legal advice.

If you are about to start a new relationship, have any concerns about your current relationship or would simply like the certainty of knowing how your financial circumstances would be affected by a relationship breakdown, it is important that you consider the benefits of a BFA and obtain the right advice as soon as possible to avoid any costly delays.

If you are considering or want to know more about prenups or Binding Financial Agreements, we can direct you to a competent team of lawyers at Fletcher Clarendon who will endeavour to help. Alternatively, please feel free to get in touch with us and we can arrange for a preliminary discussion.

References:
1. Using the selected years and indicators provided by the Australian Bureau of Statistics, the average divorce rate in Australia between 1996-2016 was 42.05%. See: http://www.abs.gov.au/ausstats/abs@.nsf/mf/3310.0
2. Hoult & Hoult [2013] FamCAFC 109; and, Fewster & Drake [2016] FamCAFC214.
3. Spousal maintenance is financial support paid by a party to their former spouse in circumstances where they are unable to adequately support themselves.

Disclaimer: The content of this article was written by Fletcher Clarendon’s legal team. The information contained in it is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.

Authors

Josh Flett