This post is the second of our series on Binding Financial Agreements. If you have not already done so, we recommend you read our first post in the series; What is a Binding Financial Agreement?, first.
Should I enter into a Binding Financial Agreement?
Treat a Binding Financial Agreement (‘BFA’) as a contract. As you would, entering into any contract, should not be taken lightly. As the name suggests, BFAs are legally binding and a party cannot simply change their mind and walk away from it.
Even the death of a party does not impede the operation of a Binding Financial Agreement, and it will continue to be binding on that person’s representative.
While they come with significant benefits, BFAs are not without their faults. The pros and cons of executing a BFAs will vary on a case-by-case basis, depending on the individual financial circumstances of the parties and the clauses contained within the agreement itself.
Seeking tailored legal advice will give you the best answer to whether you should enter into a BFA.
However, there are some general advantages and disadvantages that are applicable across the board and should be considered by parties contemplating a BFA:
Advantages of entering into a Binding Financial Agreement
- Family Court outcomes are never certain. However, this is more so the case when there is no BFA or an agreement for property division after separation. The parties’ financial futures can be much more uncertain without one. Parties can be very specific about how they would like assets and resources to be divided in the event of separation in a BFA.
- A predetermined financial settlement can achieve a reasonably fast division of assets and resources after separation. Cutting ties quickly keeps relationships as amiable as possible, without the emotional stress of ongoing negotiation and litigation.
- A properly drafted and executed BFA excludes the jurisdiction of the Family Court and ensures no further litigation ensues.
- Financial Planning. A BFA provides certainty about finances in the future and how the division of net assets and resources will occur. This generally allows parties to make financial plans for the future with greater certainty.
More advantages of entering into a Binding Financial Agreement
- Estate Planning. Parties who have children and are entering into a second relationship are able to protect and preserve their assets for their children, rather than their second partner or that partner’s children.
- Tax Benefits. BFAs afford parties the same significant tax benefits as Family Court orders. Parties enjoy the benefit of stamp duty concessions and Capital Gains Tax rollover benefits, in circumstances where they would ordinarily apply. These tax benefits do not apply if parties divide property by way of a private or informal agreement.
- Third parties. Helpfully, third parties can be parties to a BFA. For example, agreements can recognise parents who lend a couple a significant amount of money to buy their first home. This allows them to protect that loan.
- Time and Cost. In most cases, the preparation and execution of a BFA can be achieved within a month. Of course, this depends on the complexity of the parties’ finances and the nature of the negotiation. Conversely, engaging in Family Court proceedings and/or dispute resolution can take years to reach a determination despite the best efforts of all involved. Protracted litigation is often significantly more costly than the preparation of a BFA.
- Only parties and their lawyers need to be involved in negotiating the terms of a BFA. In contrast, members of the public and even other litigants can observe Family Court hearings. The Family Court often calls upon family, friends and independent experts to appear witnesses.
Disadvantages of entering into a Binding Financial Agreement
- Personal changes. When preparing a BFA, it is impossible to foresee and plan for each parties’ personal circumstances in years to come. Life can throw curveballs and lead us in directions that no one saw coming – affecting factors such as income, health and earning capacity. As a result, parties may become bound by a BFA that was once fair but is now effectively a “bad bargain”.
- Financial changes. Parties’ “family entities” might change and evolve over the years. For example, a trust or company might change in structure, as might the shareholding or directorship. This can cause issue after separation where one party says their interest is in the present day structure, while the other party does not accept this is so.
- Legislative changes. Parliament can amend or appeal existing laws, implementing changes to legislation that gives effect to BFAs. These changes can retrospectively affect BFAs that were executed years prior and alter enforceability and treatment of the agreement.
- BFAs executed in Australia are governed by Australian law only. While terms of the agreement may deal with overseas property, it may not be possible to implement and enforce these terms after separation.
More disadvantages of entering into a Binding Financial Agreement
- Financial control. There are inevitably cases where the financially stronger party insists on a BFA. This will be to protect and preserve their assets in the event of separation. As mentioned earlier, this is not grounds for the agreement to be set aside. Note that a “bad bargain” for the financially weaker party is still enforceable.
- The preparation and execution of a BFA is usually significantly more cost effective than litigation. However, this still involves incurring costs. For BFAs to be binding, both parties must seek legal advice and be represented by an independent lawyer. Failure to comply with this legislative requirement can render a BFA void or set aside.
- Simply put, BFAs are unromantic, and hence, have a certain stigma. Parties don’t usually enter a marriage or relationship expected it to fail. So naturally, the contemplation of a BFA can suggest otherwise, causing emotional tension and perhaps mistrust.
- You can set aside a BFA. The High Court of Australia decision of Thorne & Kennedy [2017] cast a spotlight on the ability for BFAs to be set aside.
We explore this critical disadvantage further and provide tips to avoid setting aside agreements in our blog post. When can a binding financial agreement be set aside?