As a financial adviser, accountant or lawyer outside of family law, you are likely to be familiar with Binding Financial Agreements (BFA). But do you make your clients aware that these can be used as asset protection strategies?
With the increase in blended families and separations in recent years, exploring all options for your clients when it comes to protecting their assets, is more important than ever. For clients who are embarking on a new relationship, or even already in a relationship, a BFA can be considered.
In this article, we explore what a Binding Financial Agreement is, how it serves as an asset protection mechanism and when it might be appropriate for you to recommend your client have a family lawyer help them to protect their assets in this way.
What is a Binding Financial Agreement?
A Binding Financial Agreement is essentially a contract between two parties that sets out, in a formal manner, how a couple's property, assets, superannuation and liabilities will be divided in the event of a breakdown of a marriage or a de facto relationship. There is a requirement for each party to have been independently advised as to the advantages and disadvantages of entering into the BFA and both solicitors must sign a certificate indicating they have provided that advice.
There is sometimes a misconception that a Binding Financial Agreement is simply a prenuptial agreement, and only for use before a marriage takes place. This is not the case. A BFA can be entered into at any stage of the relationship. When a couple is entering into a de facto relationship, during a relationship whether married or not, or after separation.
Why consider a Binding Financial Agreement?
A BFA is essentially entered into to create a degree of certainty about what will happen in the future. They can provide clarity and a clear path for what will happen in the event of a separation.
Even if your client is in a happy stage of their relationship, it can be a worthwhile consideration to suggest a BFA to them as part of a wider asset protection strategy. This is partly because people are often more amicable and more flexible during their relationship as opposed to following the breakdown of their relationship, where there are a whole range of emotions attached to their decision-making. It is not uncommon for there to be instances where, during a separation, people are bitter and not prepared to negotiate. It can also be used as a tool to finalise the financial arrangements of separated parties and can offer more flexibility than formalising their arrangements via a Court Order, such as a Consent Order.
What are the advantages of a Binding Financial Agreement?
The end of a relationship can be incredibly stressful. If your clients do not have to add negotiating a property settlement into the mix at that point in time, it will make what is often a hard process, far less costly, stressful, and time-consuming.
One of the other major benefits of a Binding Financial Agreement is that there can be mechanisms put in place for the way that property is to be acquired throughout the relationship and whether that occurs jointly or is kept separate from the other spouse.
One of the greatest advantages is that there is a degree of flexibility for both parties. An experienced family lawyer will be able to prepare an agreement that can provide for a whole range of scenarios. A BFA can go into as much detail as required. It may be drafted to include all assets that each person came into the relationship with and ensure that they will leave the relationship with those assets. It may be very specific and list out an inventory of item by item and asset by asset. Alternatively, it can be more broadly drafted to document a few specifics and then a percentage split of the combined asset pool. The details are based on what both people agreed to.
A BFA can also detail what will happen if one person in the relationship were to pass away. While you would be right to think this is Wills and Estate Planning territory, an executor of a will would be legally required to follow the terms of any Binding Financial Agreement in place.
For example, when a couple buys a family home together, it is typically registered as a joint tenancy. A Joint Tenancy means that in the event one person in the relationship passes away, then the property would then be automatically passed on to the surviving partner, rather than form part of the deceased’s estate. While wills are meant to cover this, there has been an increase in contested wills in recent years, so a Binding Financial Agreement can give added security.
Seeking legal advice
The important thing about a Binding Financial Agreement is that your client cannot enter into an agreement, unless both people have agreed to it. They also need to have both sought independent legal advice about the advantages and disadvantages of that agreement.
Additionally, with a Binding Financial Agreement, the asset pool split does not need to be fair as it would need to be when going through the Family Courts. So by your client having one in place, in the event the relationship ends, then they will largely avoid what can often be a costly and long negotiation process for property settlement. Essentially giving your client more certainty about their future financial position.
A Binding Financial Agreement would normally be set up as a one-time document, but there is a possibility that we can build into the agreement that there is a plan to update it after a certain number of years. Doing so is uncommon, instead, we would normally build in the future scenarios. For example, the BFA may include particular details about payments to be made, based on a certain number of years they have been or continue to live together, or it could be dependent on the number of children they have.
It is important to note that Binding Financial Agreements are not without risk. There is a chance they can be set aside by the Courts. This is why it is so important to ensure when you recommend this as a possible asset protection strategy, that your clients seek professional advice from an expert in family law.
As specialised family lawyers, whenever a couple comes to us initially to discuss the beginnings of what could be their Binding Financial Agreement, we are very careful to ensure that people understand that they must be very clear about the nature of their interests. We advise our clients that they must provide the other party with full financial disclosure information and encourage them to get evidence of the information that details the other person's assets and their financial position. We do that on both sides to ensure that there is a reduced risk of there being any issue later on, relating to insufficient disclosure of financial position and the nature of their assets.
Bringing Binding Financial Agreements into asset protection discussions
If you are a wills and estates lawyer, then you may alert your clients to this type of agreement as a second step they might be wise to consider. If you are an accountant or advisor, and your client has considerable wealth, a BFA is wise.
In the event any client is entering into a new relationship, contemplating marriage or considering a separation, a conversation with a specialist family lawyer is the first step. Once armed with information, they can then decide if a Binding Financial Agreement is something they wish to add to their asset protection strategy.
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Phillips Family Law is an award-winning Family Law practice serving clients across Australia and abroad. Regardless of where you or your clients are in the decision-making process, we help people become informed and aware of their options. To discuss your situation confidentially, phone (07) 3007 9898 or secure a time by filling in our confidential form here.
Disclaimer: The content in this article provides general information however it does not substitute legal advice or opinion. Information is best used in conjunction with legal advice from an experienced member of our team.