Why make a pre-separation financial agreement?

19 Nov 2017 1:55 PMBruce Shaw
Why make a pre-separation financial agreement?

The appropriateness of a pre-nuptial or pre-cohabitation agreement depends upon the individual circumstances of each particular couple, and it is imperative that couples seeking to make a financial agreement understand that the agreement can be set aside or found to be non-binding by the court in certain circumstances.

In the matter of Parker and Parker (2112)FLC93-499, the court was prepared to look behind a Certificate of Legal Advice, and it found that appropriate legal advice had not been given, despite Certificates of legal advice being executed  by the lawyers.

In the subsequent matter of Hault and Hault (2013)FLC 93-546, the full court adopted a different view in relation to Certificates of Independent Legal advice; finding that the onus remains on a legal practitioner to establish that the requisite legal advice was given but, held there is no mandatory requirement to document the actual legal advice provided, prior to issuing the Certificate of Independent Legal Adivce.  However, it remains best practice for legal practitioners to carefully document the matters canvased and the advice given in order to evidence the advice meets the requisite standard. 

The advice required under the Family Law Act is more than an explanation of the meaning of the agreement and should include (but not be limited to):

  • an assessment of the party’s entitlement under the Act; and

  • a weighing up of the party’s entitlements under the Act; and

  • explanation of the meaning of the agreement as a whole and its parts; and

  • explanation of the advantages and disadvantages of entering the agreement; and

  • recommendations or otherwise as to whether the party should execute the agreement.

Pre-nuptial and pre-habitation financial agreements may not be appropriate for young couples intending to have children as it is difficult to protect one party’s initial contributions because of the vicissitudes of life. For example the court may set aside a financial agreement under s90K(1)(d) or 90UM(1)(g) of the Act if it is necessary to do so in order to provide for the care or welfare of a child or children after separation.

A financial agreement must make reference to the particular section of the Act that the agreement is made under; for example, whether it is made pre-cohabitation, during co-habitation or after separation. Because, important distinctions exist in the way some issues can be dealt with in financial agreements made before, during or after separation, these include:

  • superannuation;

  • initial financial and non-financial contributions;

  • spousal maintenance.

Section 90MH(1) (marriage) or s90MHA(1) (de facto relationship) provides that either or one party’s Superannuation interest can be split via a financial agreement; and it is not necessary for the superannuation interest to exist when the agreement is made.  The financial agreement must however, express either as a percentage, an amount or some other method of calculating the base amount of the split at the date of separation in compliance with 90MJ(1)(a) of the Act.

A Pre-nuptial or Pre habitation financial agreement quarantining one party’s initial contributions may endure for many years prior to a couple's separation; and produce an unfair outcome for one party at the time of separation. Although, fairness is not the legal test, a fair outcome may reduce the risk of one party seeking to set the financial agreement aside or mounting a case that the agreement is not binding. Vicissitudes of life impacting on “fairness” may include (but do limit the generality of the foregoing):

  • the birth of children;

  • the length of the relationship;

  • income levels;

  • future earning capacity;

  • health matters;

  • issues of testamentary capacity;

  • unexpected windfalls and inheritances.

A financial agreement must clearly identify the particular initial contribution to be protected, and the value should be agreed upon by the parties but, if a value cannot be agreed upon, an independent valuation should be obtained. Parties who do not agree on values may decide not to incur the extra cost of a valuation but, in that case the different values should be set out in the financial agreement.

There is a risk the court may set the financial agreement aside under s90K(1)(d) (marriage) or s90UM(1)(g) (de facto relationship) if the quarantined initial contribution amounts to the bulk of the property pool; particularly if it is necessary for the care and welfare of a child or children.

Section 90F (marriage) and s90UH (de facto relationship) provide important restrictions on spousal maintenance provisions in financial agreements:

  • sub section (1) provides, no provision in a financial agreement excludes or limits the power of a court to make an order in relation to maintenance of a party to a marriage if subsection (1A) applies;

  • sub section (1A) provides, this subsection applies if the court is satisfied that, when the agreement came into effect, the circumstances of the party were such that, taking into account the terms and effect of the agreement, the party was unable to support himself or herself without the assistance of Centrelink.

Accordingly a financial agreement may oust the court’s jurisdiction to make orders for spousal maintence in pre-nuptial or pre-co-habitation financial agreements if both parties are able to support themselves without the assistance of Centrelink at the time the agreement was made.

Pre-nuptial and pre-cohabitation financial agreements may be appropriate in the following circumstances

  • in second marriages or de facto relationships:

    • to protect prior assets;

    • to ensure children of previous relationships inherit;

  • for older newly married people who have accumulated assets;

  • to preserve intact for future generations, farms and businesses which have been in the family for generations;

  • to protect the assets of one party where there is a significant difference in the wealth of the parties;

  • to protect assets which may be inherited during the marriage or de facto relationship;

  • to give greater weight to contributions made during the marriage or de facto relationship by a high earning spouse than might be recognised under the Act;

  • if the financial affairs of one party involve third parties such as a parent, trust or company, and that party wants to protect the third party rights from the other spouse;

  • to recognise gifts or settlements made by one party to the other party before or during the relationship; and ensure they are taken into account in the event of a separation;

  • where one party finances the other party’s education directly or indirectly “the medical student’s wife syndrome”;

  • where one party has substantial debts at the commencement of the marriage or de relationship;

  • to protect the rights of a party who feels that his or her rights will be better protected in a formal agreement then with the discretion available to the court under s79or s90SM of the Act;

  • where one or both parties are a member of a religion or culture which sanctions a party who refuses to co-operate in a divorce according to a doctrine of that religion or culture.

Potential advantages of a financial agreement

  • clarifies initial and ongoing financial contributions of the parties;

  • prioritises important issues, such as; family, children and employment;

  • promotes candour and open communication in respect of financial matters;

  • promotes good will as there are no secrets from each other;

  • prevents disputes about the value of assets at the time of entering the agreement;

  • removes a significant source of stress;

  • provides the parties with greater certainty and control over their financial affairs;

  • expedites resolution of financial matters following separation;

  • a measure of protection against a future spousal maintenance claim.

Potential disadvantages of a financial agreement

  • is a bad or negative start to a marriage or relationship as it contemplates faiuire; 
  • may dugest a lack of trust in the other partner;
  • may suggest a lack of confidence in the marriage or de facto relationship;
  • distracts from a relagious committment to a permanent marriage;
  • is inconsistent with romantic vision;
  • introduces "the morals off the market place" into an intimate relationship;
  • may render the party who is  more committed to the relationship vulnerable to exploitation;
  • may treat one party unfairly.

Termination of a financial agreement

Section 90(1) of the Act provides:

  • a financial agreement may be terminated by a new financial agreement which includes a provision to that effect; or
  • by the parties making a separate termination agreement. 

Section 90J of the Act provides that a termination agreement is binding on the parties if and only if;

  • it is signed by all partiues; and
  • each spouse party was provided with legal advice before signing;and
  • a copy of the Certificate of Independent Legal Advice is given to the other party or their solicitor; and
  • the financial aagreement has not been set aside by the court.

Parties to a financial agreement (absent a valid termination) are foregoing access to the justice system in the event of separation.  Accordingly, we entertain few doubts that the preparation of a financial agreement requires considerable skill care and consideration.  They are the fertile ground for legal practitioners with specialist family law knowledge, and an area of jeoperdy for the incautious.