I recently presented at the Law Australasia conference on the topic of Binding Financial Agreements (BFA’s) as an estate planning tool – to an audience of accountants, financial planners, commercial lawyers and business advisory professionals. In my presentation I detailed, in the context of estate planning, how they might utilize BFA’s in the protection of their clients’ assets by identifying circumstances where a financial agreement is highly beneficial.
When is a financial agreement recommended?
In my years of experience in Family Law, there are are a number of scenarios where a financial agreement can be useful:
1. ‘Second Timers’ – when a couple start a new relationship and one or both bring assets to the relationship.
2. ‘Family loans/gifts” – It is increasingly common for parents to provide financial assistance to their child and their partner for a deposit on a house. For many parents they are not comfortable with the funds being considered a gift and prefer it to be treated as a loan. In the event of the child and their partner separating, often loans are perceived as gifts and gifts are perceived as loans and the Family Court can ultimately make that decision.
3. ‘Children of wealthy parents’ – when a child starts a relationship and he or she is likely to receive a significant inheritance upon the parents’ passing. This is type of agreement is put in place often when parents wish to preserve the inheritance for their child, in the event of the child’s relationship ending.
4. ‘Those handing down the farm’ – this is what estate planners refer to as ‘generational wealth transfer’ – when parents are preparing to retire and intend to hand over the family business to a child and their partner. The financial agreement is designed to protect the farm or business that has been in the family for some time, in the event of a relationship breakdown.
For the ‘second-timers’, a BFA predetermines the financial outcomes of each party in the event of the relationship breaking down, as it removes the discretion of the Court to divide their assets. Parties often use an agreement which is a separate/joint model. This means the parties can enter in to the relationship secure in the knowledge that if they separate they will each preserve and protect what they brought in and share in joint property in an agreed manner. Typically these arrangements are mirrored in their wills.
Whilst a prudent adviser would have a written loan agreement if parents to provide financial assistance to their child and their partner for the deposit on a house and in some cases that loan is supported by a registered mortgage, it is important to understand that this type of agreement does not prevent a Family Court Judge from ignoring the loan agreement and treating it as if it were a gift. There have been cases where judges have concluded that, despite the contribution being documented as a loan on paper, they believe that he parents never actually expected to be repaid the sum and therefore the contribution should not be considered a liability when ruling on the division of assets.
For the children of the wealthy, the BFA may include a quarantining agreement whereby the inheritance provided by the parents is retained by the child, but everything else in the asset pool is to be divided up in accordance with Family Law principles.
For the family passing down the family business or property, the BFA may, for example, pre-determine the amount to be received in the event of a relationship breakdown, as well as have specific terms relating to how the payment is paid to avoid assets needing to be sold in order to pay out the agreed amount. This then removes the uncertainty about what a court might impose on the parties and the wider family.
A binding financial agreement is one that complements estate planning services and can go a long way towards Family Court-proofing’ them as well. So if you are an accountant, financial planner, business advisor or commercial lawyer, asking your clients the question ‘Have you considered a financial agreement?’ is an important one. As a trusted partner in your clients’ lives, putting this question to your clients can significantly assist in the protection of their assets.
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