Binding Financial Agreements – are they still legally binding?

Binding Financial Agreements (BFAs).

Legal Consolidated Barristers & Solicitors no longer does BFAs.

To date, all Legal Consolidated BFAs have been upheld in the Family Court and other Courts. We have stopped doing BFAs while we have a 100% success rate. In our view, the Family Court keeps looking at new ways to try and strike down a BFA. We do not want to be part of that arbitrary and uncertain system. We are of the view whatever you do, the Family Court will still find a reason to overturn your BFA if the Family Court does not like the outcome. This is irrespective of the fact that your BFA completely complies with the law.

However, the information below may help you find an Australian lawyer still willing to do Binding Financial Agreements.

BFAs are also referred to as ‘prenuptial agreements’, ‘prenups’, defacto agreements and Superannuation Agreements (the last one being restricted to just Super).
They are available before, during and after marriage. They are available to de facto couples that never intend to marry. They include same-gender relationships.

BFAs were designed to keep the Family Court from interfering in your affairs if you ever separate. Instead, the BFA is meant to determine how you split up your assets. You can also enter into a BFA to just determine how your superannuation is split.

Is the BFA a ‘binding’ agreement on the couple?

The Family Law Act sets strict and formal requirements for a BFA. You must honestly and fully disclose your assets, debts and financial resources – from all over the world. It is important to use the services of your accountant and adviser to help ascertain your complete family balance sheet.

You must give full disclosure. You cannot underestimate any of your assets. You cannot leave out any of your assets. If you do then your BFA is not valid.

If you wish to hide anything from your partner then a BFA is not for you. If you wish to keep secret an asset then the BFA will not work. If you have a secret asset overseas then you must disclose that and all other assets. All trusts that you may have an interest in or some control over – anywhere in the world – need to be fully and openly disclosed and discussed.

Your lawyer is not involved in preparing your list of assets and their values. This is the job of your accountant. Your accountant prepares that information for the BFA. Your accountant signs off to confirm that the information regarding your assets is correct. This is a heavy burden for your accountant.

Both parties need private independent legal advice about the consequences of entering into a BFA so that: 1. you understand the document’s consequences; and 2. you are not being influenced by your partner.

Q: What are the most common purposes of a Binding Financial Agreement?

Many happily married couples complete BFAs dividing everything 50/50. While this sounds quite boring – it is what the Family Court often decides on anyway – so to set up the agreement now avoids the expense and emotional pain of the Family Court. The second most common BFA is the grandparents putting pressure on the son to enter into a BFA so that the farm remains with the next generation.

Q: At death, what prevails – the Will or the BFA?

The BFA is dormant until you separate. If you die without the BFA coming into effect, then the Will prevails. While in a challenge to a Will, I have seen the Court prepared to look at the BFA, but it is certainly not bound by it, in those circumstances.

Q: Does the Family Court ignore BFAs?

Given that many BFAs are not enforced by the Court, people must wonder if they are worth the paper they are written on.

BFAs were introduced to remove the Court from the process of dividing up your assets. The government wants you to decide for yourself how you want your assets divided if you separate.

BFAs are a creature of Statute. The Statute sets out the exact way of doing them. But sadly the Family Court and family lawyers will do their best to overturn a ‘perfect’ BFA if they believe it to be ‘unfair’.

Provided that:

1. the parties truly and openly fully disclose all their assets and other matters;
2. the drafting is without blemish by the 2 separate law practices, acting for each party; and
3. the lawyers, accountants and financial planners all give sign-off on what is fair

then the Binding Financial Agreement may be more enforceable.

The first case of a BFA not being enforceable was Black v Black. (The Courts often use made-up names to protect the parties.) In that case, the two separate law practices appeared to do everything correctly. Everything was signed off. Then there was one small change to the BFA, but only one firm of lawyers signed off on the amendment. The BFA was thrown out for the one blemish. Minor blemishes are sudden death to the validity of the BFA.

Q. What if there is duress?

What if the bridegroom threatens “If you do not sign this Binding Financial Agreement the wedding is off”?

In the High Court decision of Thorne vs Kennedy Case B14/2017, the Court considered where the BFA was voidable under duress, undue influence, or unconscionable conduct. The primary judge found that Ms Thorne’s circumstances led her to believe that she had no choice and was powerless, to act in any way other than to sign the prenuptial agreement. It was, therefore, set aside.

The parties met on the Internet in 2006 when Ms Thorne was living in the Middle East and Mr Kennedy was living in Australia. Ms Thorne was 36 years old, with no substantial assets. Mr Kennedy was 67 years old and was a property developer with assets of AUS$18 million. Ms Thorne moved to live in Australia in February 2007, and the wedding was set for 30 September 2007. On 19 September 2007, Mr Kennedy told Ms Thorne that they were going to see a solicitor to sign an agreement. Mr Kennedy told Ms Thorne that if she did not sign, the wedding would not go ahead. Ms Thorne ultimately signed the prenuptial agreement pursuant to section 90B of the Family Law Act on 26 September 2017, four days before the wedding. She did so against legal advice.

Ms Thorne’s lawyer said what she would get was “piteously small” in the context of Mr Kennedy’s wealth.

The High Court unanimously held that the agreements were voidable (pursuant to section 90K(1) of the Family Law Act) due to unconscionable conduct. The majority (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ and Nettle J in a separate judgment) also found that the agreements were voidable due to undue influence. Justice Gordon, in a separate judgment, held that the agreements ought to be set aside due to unconscionable conduct but not undue influence.

Q. What if there is undue influence?

The court looks at the husband and wife’s conduct. Was there unconscionable conduct or undue influence?

‘Unconscionable conduct’ for a Binding Financial Agreement is:

• a special disadvantage between the parties
• ‘a strong emotional dependence or attachment’
• a special disadvantage that ‘seriously affects’ the weaker party’s ability to safeguard their interests

however, it is not sufficient that there is an inequality of bargaining power

‘Undue influence’ for a Pre-nup Agreement is

• where you are deprived of ‘free agency’ when signing the agreement
• there is something so strong that the influenced party is under the belief that while the document is not what they want, they feel compelled to sign it anyway

The High Court lists undue influence for BFAs as:

1. the BFA was presented as not subject to negotiation
2. emotional blackmail – threat to end a marriage, to end an engagement or delay the marriage
3. the BFA being signed near the day of the marriage
4. no time for careful thought and reflection
5. the nature of the parties’ relationship
6. the relative financial positions of the parties
7. the independent advice that was received and whether there was time to reflect on that advice

 You need to make sure there is no unfairness or threats.

In a challenge to the validity of a BFA a Lawyer’s evidence may win the day

Johanson & Johanson [2022] FedCFamC1A 74

No error has been found in a primary judge’s approach. This involved preferring the evidence of a husband’s former solicitor. This is over the evidence of the husband for independent legal advice. Independent legal advice must be provided for all binding financial agreements to have any hope of them being accepted.

After the parties separated, they entered into a binding financial agreement. This is to:

• divide up their property; and
• providing for spousal maintenance.

A few years later the husband ceased spousal maintenance payments. In disgust, the wife seeks enforcement proceedings. The husband then seeks a declaration that the financial agreement is not binding. He now argues his own lawyer had not received the requisite independent legal advice.

The husband gives evidence as to the legal advice he received, at the time. But, his evidence directly contradicts the evidence given by his former lawyer. And primary judge believed the former solicitor’s account.

The husband’s application is dismissed. A declaration states that the BFA is binding. But a lot has happened since then. The Family Court has found otherwise to remove Binding Financial Agreements that they do not like.

The husband appeals to a higher court in Johanson & Johanson [2022]

The husband appeals. He now asserts that the primary judge erred:

• This is in finding that the husband received independent legal advice before he signed the agreement; and
• failed to give adequate reasons as to why the judge preferred the evidence of the husband’s former solicitor over the husband’s evidence.

The Full Court of the Family Court of Australia disagreed with the husband. They found that the primary judge did highlight specific evidence as to the advice provided to the husband. This is concerning his rights and the
advantages and disadvantages of making the BFA.

Although much of the lawyer’s advice is given orally and the solicitor’s file notes are less fulsome than they might have been, it was open to the primary judge to prefer the evidence of the husband’s former solicitor over the husband’s own account.

This is another reason why many lawyers, including Legal Consolidated, no longer are involved in this high-risk area of law.

Q. Cost to set up a Binding Financial Agreement

You need for your pre-nup:

1. a taxation or family lawyer specialist
2. an accountant
3. a financial planner

Your spouse also needs a separate law firm, accounting house and financial planning practice:

1. a tax or family law firm specialist
2. an accountant
3. a financial planner

That is a total of 6 expensive specialist people from 6 different firms and practices. All of them will want to have input into the agreement. Some will want to engage in lengthy negotiations. This can take many months.

What is the time frame for a cohabitation agreement to be signed?

With six professionals involved in the process the time frame to set up the BFA is about 3 to 6 months. However, the shortest time period we have done one is 4 working days. Over half of all BFAs never get signed because the process drags out for so long, or one of the parties loses interest in the proceeding. There is a 90% chance the BFA will never get signed if the process is taking longer than 6 months.

Is it better to get the BFA signed before I get married?

That is often not a relevant question. If you are already in a de facto relationship (they start after two years or less) then you are already ‘married’ under the eyes of the State government. Having said that, the earlier you do your Binding Financial Agreement or cohabitation agreement the better.

I am not yet married do I get both a BFA and a cohabitation agreement?

Yes, that is often the case. You sign both documents. They are the same document with a small change to the relevant section of the act that applies. There is generally no additional cost for doing both agreements – as they are virtually identical.

Q: My family lawyer tells me it is better to have a family lawyer prepare a BFA, not a taxation lawyer. Also, my family lawyer states that an accountant is not required

The two biggest times to tax plan in your life are death and divorce/separation.

2. Family Law: while there are huge tax concessions in separating they are rarely used. This is because the couple often fight at that time in the relationship. With a BFA, as the parties, are working together a taxation lawyer is well-suited to prepare the document.

Why get the accountant involved? Many BFAs are overturned by the Family Court. It is as though family lawyers and the Family Court are angry that the government allows people to make their own decisions about how they want their assets divided. Further, a number of Law Societies have written to their members to say that a BFA is ‘crystal ball gazing’ and lawyers are not trained to do this. This is why we have your accountant sign on to explain and set out your assets. To date, not one of our BFAs has ever been overturned by any Court.

Consider future Capital Gains Tax in divorce property settlements

As to crystal ball gazing, with say an investment property, should you consider the future CGT when you do a BFA or the Family Court does a property settlement?

Your tax lawyer, accountant and financial planner consider tax liabilities and factors that come into their thinking before you opt to keep an asset that may have tax implications.

In the Family Law case of Rosati v Rosati (1998) FAMCA 38, there was a dispute on unrealised CGT liability. In considering the Court’s approach when making section 79 Family Law Act 1975 (Cth) orders, the Full Family Court set out the rules of engagement:

• Whether CGT is taken into account in valuing a particular asset varies according to the circumstances of the case, including the method of valuation applied to the asset, the likelihood or otherwise of that asset being realised in the foreseeable future, the circumstances of its acquisition and the evidence of the parties as to their intentions in relation to that asset.
• If the Court orders the sale of an asset or is satisfied that sale of it is inevitable, or would probably occur in the near future, or if the asset is one which is acquired solely as an investment and with a view to its ultimate sale for profit, then, generally allowance should be made for any CGT payable upon such a sale in determining the value of that asset for the purpose of the proceedings.
• If none of the circumstances above applies, but the Court is satisfied that there is a significant risk that the asset will have to be sold in the short to mid-term, then the Court, whilst not making allowance for the CGT on such a sale in determining the value of the asset, may take that risk into account as a relevant s 75(2) factor (matters to be considered when deciding property settlement cases).
• There may be special circumstances in a particular case that, despite the absence of any certainty or even likelihood of a sale of an asset in the foreseeable future, make it appropriate to take the incidence of CGT into account in valuing that asset. In such a case, it may be appropriate to take the CGT into account at its full rate, or at some discounted rate, having regard to the degree of risk of a sale occurring and/or the length of time which is likely to elapse before that occurs.

It is apparent from the case of Rosati that the inclusion of CGT as a liability depends on a number of circumstances, including importantly, the likelihood of sale in the near future or immediate future or considering whether the asset was acquired solely as an investment with a view to selling it and making a profit. However, the Court has the discretion as to whether CGT ought to be included as a liability and thereby, matters are often determined on a case-by-case basis. It is important however to be aware of the possible consequences if CGT is an issue.

So you can see the problem of crystal ball gazing. If there is an asset of the relationship that is subject to CGT, it is important that independent legal advice and taxation advice is obtained. This is where accountants and tax lawyers work together to best identify the taxation and other financial risks associated with a given pool of assets.

Can I hide superannuation assets from the Family Court?

Under the Family Law Act 1975 and the Income Tax Assessment Act 1997, not only is it illegal it is almost impossible to hide your superannuation assets from the Family Court.

Superannuation is fully transparent to your ex-spouse

From April 2022, persons involved in post-separation legal settlements are able to apply to the Family Court. This is for information from the Australian Tax Office. This is about their ex-partner’s superannuation holdings. (See Treasury Laws Amendment (2021 Measures No. 6) Bill 2021, Parliament of Australia.)

Half of Australians divorcing have more than one superannuation account. That makes family property proceedings difficult. This is especially if your former partner hides the existence of a superannuation account.

How is superannuation split when a couple separates?

Superannuation is ‘property’ in a relationship breakdown. It is no different to your home and bank accounts.

When a couple separates, their combined super can be split between them by mutual consent or by court order. (See Superannuation Splitting, Attorney-General’s Department.)

Splitting super does not convert into immediate cash. But it is subject to superannuation preservation laws. The money stays in a super fund until a release condition is satisfied.

A second option is to defer a decision with a “flagging agreement”. This is until the superannuation holder dies or retires. This stops the super fund from paying out from the account until the flag is lifted.

A third option is not to touch super accounts. But to take the superannuation assets into account when dividing other property.

Can I be ‘married’ to two people at the same time?

Yes, the Courts seem to support the notion of bigamy.

Any help with Asset Protection?

Yes, see here.

Legal Consolidated Barristers & Solicitors does not do BFAs

Legal Consolidated Barristers & Solicitors does not do BFAs. The information above is purely to help you.

To find an Australian law firm still willing to do BFAs you can telephone your local Law Society (Institute in Victoria) in your home State or Territory.