Burning Question about Prenups
Each month when we send out our newsletter we invite you to send us a Burning Question on topics such as leasing property,family law,employment or general business contracts.
In April we were sent this one:
"Why do some say that they are absolutely necessary and others say that they are very easy to break? Is a good lawyer and prenup non-existent? Would love to know a bit more about prenups?"
Before we proceed, I just want to make it clear that under Australian Family Law the correct name for a Prenup is a Financial Agreement. Financial agreements can be made before, during or after a relationship.
At present if you want to protect, or shall we say quarantine certain assets from spousal claim, the only instrument available to you is a financial agreement. They allow couples to decide how their assets will be handled at the beginning of the relationship, should the relationship break down at some time in the future.
In a Financial Agreement, both parties give up the rights they would otherwise have under the Family Law Act to apply to the Court for the division of the asset pool. Instead, the couple make their own agreement about how assets will be dealt with up front, both during the course of the relationship, and in the event that the relationship comes to an end.
Whether a prenup is absolutely necessary would depend very much on your personal circumstances. If you need to protect assets then you may consider it necessary but if you don't need to protect assets then you might not. Remember too that it's not just about assets - you may want to quarantine debt.
Although I don’t agree with what you’ve heard about prenups being “very easy to break”, the Family Law Act does envisage some circumstances in which the court may set an agreement aside. In other words, the court can make a decision about whether an agreement should stand and therefore bind the parties, or it can terminate the agreement.
The circumstances in which a prenup can be set aside are very limited, and a person must have a good reason to apply to the Court to terminate a Financial Agreement.
For example, the Act envisages the Court having the power to end a Financial Agreement where:-
- Fraud - one party has fraudulently induced the other party to sign the Agreement. This includes where one party was not upfront about all material matters that would have impacted on the other party’s decision about whether or not to enter the agreement. This could entail, for example, hiding assets, or not disclosing the true value of the assets that make up the asset pool, resulting in the other party receiving less than they would otherwise have agreed to;
- Defeating creditors – the parties entered into the agreement to place assets out of reach of creditors by transferring them from one party to the other; There have been cases where creditors who have suffered lose because of the above actions have applied to have the agreement set aside.
- Circumstances arise making the agreement impractical to be carried out – for example, if the matrimonial house was central to the Agreement and the house burns down and no longer exists, or becomes encumbered (by a mortgage), sold, changes form etc.
- Hardship relating to children – since making the agreement, a material change in circumstances occurs relating to the care, welfare or development of a child of the relationship. As a result, the child or party caring for the child, will suffer hardship if the agreement is not set aside;
- Duress – one party was forced into signing the agreement by duress or undue pressure.
Follow the correct procedure to ensure your Financial Agreement is legally binding.
Section 90 G of The Family Law Act lays out the correct procedure to ensure your pre-nuptial financial agreement is binding. As long as the parties to the agreement are totally honest with each other, receive legal advice before signing the agreement then the you minimise the chances of a successful challenge. A good lawyer will ensure that this is done correctly (our Document Review Service follows these guidelines to the letter.)
Making a prenup agreement at the outset of a relationship, is a bit like trying to look into the future with a crystal ball. In reality, future circumstances of each party can never be predicted with 100% accuracy, and sometimes, things might happen that neither expects. It is in this way that a prenup differs to an agreement made at the end of a relationship (separation agreement).
A prenup may be made a number of years before separation occurs (if separation does occur at all).
For this reason, it is recommended that you review your Financial Agreement at regular intervals. You can terminate it, or change it, at any time if you both agree, although you still need to get legal advice before making any changes.
Some couples include “sunset clauses” in their agreement that may trigger the need to renegotiate the agreement or bring the agreement to an end in certain situations. The arrival of a child or another life changing event could bring un forseen circumstances that require a degree of flexibility. If you can envisage it you can plan for it.
- The family law in Australia currently offers pre-nups to couples who want to create certainty and protection around their financial matters at the point of entry into the marriage or de facto relationship;
- The parties cannot foresee the future with complete accuracy, and unexpected events may occur which impact on their agreement;
- There are certain circumstances where a Court can end your Agreement. These circumstances are very limited, and a party needs to have a very good reason to apply to the Court to end an agreement;
- You can agree to review or terminate your Agreement at a specified time, or on the birth of children or other defined circumstances to make sure that it is still accurate and reflects the wishes of both parties as they change over time;
- You can terminate or change your Agreement at any time by mutual consent.
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By Ian MacLeod