Bowen Buchbinder Vilensky

Pre-nups Useful, But Not Watertight

The Australian - October 2012

Binding Financial Agreements (BFAs), better known as ‘pre-nups,’ are a useful but no means watertight solution to protecting the wealth of you and your children.

Although many Australians are familiar with the concept thanks to popular culture, binding financial agreements (BFAs) are less frequently used in Australia than in the US. Some lawyers are skeptical of them while others support their use. So what are BFAs, exactly? When might they be useful? And will they work when you need them most?

By way of background, we’re encountering BFAs a lot more often these days because Family Law and Estate Planning are converging on an unprecedented scale. As the baby boomer generation heads into retirement, it does so benefiting from dramatically increased values in property prices in recent decades, and in some cases people have built up successful businesses. A lot of boomers and their now middle aged off-spring are in blended families, multiplying the complexity not only of family dynamics in the here and now, but also the expectations and claims a range of family members may have on a person’s estate.

What has any of this got to do with BFAs? Quite simply, Family Court judges are able to take into consideration not only what a person earns or owns right now, but what he or she can expect to own in the event of inheriting part of the family estate, whether that’s a property, business, farm or other asset. So it’s hardly surprising that people are seeking legal protection for all manner of scenarios.

BFAs can serve the purpose of setting out the division of assets, before a couple gets married, in the event of them divorcing or for de facto relationships on the termination of that relationship. A BFA can even be used during an otherwise happy relationship to set out what happens if the relationship breaks down. BFAs can also be used when a couple who are divorcing or separating are able to come to an agreement about a division of assets as an alternative to court orders. This can provide an effective short cut, enabling couples who are able to agree on a split of assets, to move on with their lives, rather than wait many months for a judge to decide on the division of assets.

Being aware of the reasons why BFAs have been set aside in the past is of critical importance to anyone contemplating such an agreement. It is important to ensure that both the drafting of a BFA, and the process by which both parties negotiate and execute the agreement is carried out in such a way that it reduces the risk of a challenge in the future. It is important to ensure that both sides not only receive adequate, independent legal advice, but that this process is properly carried out and documented.

My own view is that BFAs still serve a useful purpose in creating a legal obstacle and deterrent, notwithstanding the current willingness of judges to scrutinise and set aside them aside. Individuals may be able to have a BFA overturned, but they would still have to take the matter to Court, run an argument that they were, for example, ‘bullied’ and then await the Court’s decision. The emotional and financial stakes and costs are much higher than if there was no BFA. While a carefully drawn and correctly executed BFA may not guarantee a complete and irrevocable solution, used in conjunction with other legal protection, it can serve as a powerful deterrent.

But BFAs are not straightforward. Asking your girlfriend or fiancé to sign a legal agreement spelling out the division of assets in event of divorce or separation is not an area where the law and human relationships sit comfortably. This will no doubt remain the case unless BFAs become more commonplace.