Unsurprisingly there is no such thing as a Friendly Agreement under the Family Law Act 1975 (the Act).
However financial agreements are prescribed under the Act. When a couple enters into a financial agreement, they relinquish their rights to bring a claim against each other for a property split or spousal maintenance in the Family Court, if they separate. A financial agreement can be entered into before, during or after a relationship.
In this post, the first in a series on financial agreements, we will provide a succinct overview of friendly agreements – financial agreements entered into when a couple’s relationship is continuing and life is good. Whilst thankfully most relationships tend to survive the course of negotiating a financial agreement, the process does compel a couple to ask some probing and uncomfortable questions of each other. Interesting questions like, “How much are you really worth?” and more pointedly “How much of that will I receive if we don’t last?”
In future posts, we will deal with inheritance protection agreements, international financial agreements and financial agreements and third parties.
Why are they relevant?
Firstly. most of us are aware that in these days of choice and living longer the likelihood of experiencing the breakdown of a long term relationship is a common and accepted reality. A financial agreement greatly reduces the financial uncertainty which surrounds the end of a relationship.
Secondly, we live in a time of unprecedented financial prosperity which has enabled the baby boomers and generation Xers to accumulate far greater wealth than previous generations. There is a strong desire to preserve that wealth.
A well-crafted financial agreement provides financial security and clarity. Financial agreements have particularly high value in the following situations:
- Where both parties have substantial wealth or one party has substantial wealth and the other does not. Parties and their families are keen to ensure that there is a binding mechanism to preserve that wealth.
- Where parties are on their second (or third or goodness knows!) relationship and they wish to preserve what they have worked hard to build up. We often find adult children are acutely invested in the preservation of what their parents have accumulated.
- It is very common for parents or families to transfer significant funds to children to assist in the dream of purchasing a house. The treatment of these gifts/loans/inheritances is frequently contentious in family law proceedings. The most effective way to protect this financial provision from a family law claim is for the child to enter into a financial agreement.
- To protect the viability of a business from relationship breakdowns, especially when the value of the business is high in relation to other assets the parties have. The livelihood of other business owners and employees should be taken into consideration.
What can financial agreements do?
There is a high degree of flexibility in how financial agreements operate. They can be set up to cover all existing and potential property of a relationship, or to quarantine a particular asset or class of asset such as inheritances, leaving the balance of assets to be divided by agreement between the couple or to be adjudicated by a court upon separation.
Financial agreements should have clear definitions around classes of properties (including future property) usually by reference to ownership. The agreement should clearly set out how property is to be dealt with upon separation.
Importantly, an agreement does not have to lead to ‘fair’ outcomes or outcomes that would remotely look like the outcome a Court may arrive at. It would however be unwise to enter into an agreement that could result in one party suffering financial hardship. In that case a Court may be especially vigilant in using every available avenue to try and set the agreement aside.
Do they work?
If prepared and negotiated thoughtfully and methodically, financial agreements will be upheld by a Court.
There are of course instances where financial agreements are set aside by a Court. However, there is always a valid and often plainly obvious reason why. For example:
- There is a finding of duress. It is not a brilliant idea to thrust a financial agreement at your betrothed for the first time on the eve of your wedding day.
- Assets of value are not disclosed. To gain the protection of a financial agreement you need to be open and honest about what it is you are seeking to protect. Being coy about it may lead to an unhappy ending.
- The agreement has been drafted incorrectly, inconsistently or simply does not make sense. It is a fine line between balancing flexibility and simplicity. When the balance is not executed expertly the result may be an agreement that is worth very little.
How do I go about getting one and what’s involved?
It starts with an initial meeting with a friendly and knowledgeable member of our family law team. We listen to a client’s circumstances, goals and concerns and then explain how an agreement can be drafted to suit.
We draft the agreement and walk the client through it before it is finalised to their satisfaction and made available to their spouse, perhaps over dinner or perhaps directly to their lawyer. It is an absolute requirement of the Act that both parties obtain independent legal advice.
Any alterations or issues are negotiated and then the agreement is formally executed by both parties and their lawyers.
The original agreement should be placed in safe custody along with wills and other important documents. Like a will, it should be reviewed at least every five years or when there is a significant change of circumstances, such as the acquisition of a large asset or the unexpected birth of quintuplets (a large liability).