Prenup Agreements in Australia: What you need to know in 2019

What is a prenup?

Katherine: A prenuptial agreement is an agreement between couples who are thinking about getting married or entering into a de facto relationship. It generally covers financial matters but may include other issues as well (e.g. spousal maintenance). In Australia’s family law system, these are called Binding Financial Agreements (also often called “prenups”, as in prenuptial agreements). These agreements address how to divide net assets and resources if a marriage/relationship breaks down, and effectively exclude the Family Court and the principles set out in the Family Law Act from having any say in that division.

So, essentially, couples enter into a prenup before they start their defacto relationship or get married. A similar kind of agreement, setting out how assets and debts are to be divided if a relationship breaks down, can be entered into at any stage of the marriage/relationship, and even after it has ended.

Prenuptial agreements act differently around the world. How is prenup drawn up in Australia?

Katherine: A Binding Financial Agreement (“the prenup”) has to be in writing and signed by the people entering the prenup. The spouse parties involved in the prenup must each be advised independently of each other, i.e. each must be represented by independent lawyers, and each must have been given legal advice outlining the advantages and disadvantages and the effect of the prenup before it is signed. Their lawyers must also sign the agreement to certify that they have provided that advice.

What are the benefits of a prenuptial agreement?

Katherine: There are a number of benefits to a prenup.

1. Certainty. You and your partner can set out in precise detail the way that your net assets and resources will be divided between you if you separate in the future.
2. Finality. The prenup sets out how your assets will be divided, in a way that ensures that the Family Court cannot negate or alter the agreement. This makes sure that any potential dispute is dealt with by the agreement itself.
3. Security. A prenup offers peace of mind about how future arrangements will be carried out. This means both spouses can make better plans without worrying what will happen in the future.
4. Tax Benefits. Transactions that are carried out pursuant to BFAs attract the same benefits as Court Orders. This means that parties who are to receive or exchange property can get substantial savings on Capital Gains Tax and state transfer duty in the appropriate cases.
5. Prenups are Private. Only the parties and their lawyers are involved in working out the terms of the agreement. This is very different from court proceedings, where family and friends can be called as witnesses, and proceedings can be viewed by other litigants in court.
6. Time and Cost. Preparing and entering into a prenup is not usually a protracted process. Once the parties agree on its terms, a BFA and the accompanying letter of advice can be prepared usually within one to two weeks. By contrast, if parties separate, there is no prenup in existence, and they are unable to agree on how to reorganise their assets and finances, they may have to engage in Court or other dispute resolution – and this will involve costs significantly higher than the preparation and execution of a prenup, and usually it takes months and sometimes years to resolve.

Lastly, a prenup is also useful for estate planning. It allows each party to specify what will happen with their assets in the event the relationship breaks down and means they can better plan for provision for their children. This can be especially useful in blended families, where the tension between family members can add to the stress of what is often an already stressful situation.

What are the pros of a prenuptial agreement?

Katherine: Laws can be amended or repealed; parliament could introduce changes to the existing legislation relating to prenups that take effect retrospectively, and the impact and enforceability of prenups can be affected by decisions made in the Family Court. As a result of this, there is some uncertainty about the efficacy of a prenup, in terms of the law that might apply in the future. Parties could enter into a prenup now, only to find that by the time their relationship breaks down (if it breaks down) the law has changed and the agreement may no longer have the effect which they intended.

It is possible, too, that a prenup can be used by one party (usually the party in the financially superior position) as a means of exerting financial control over the other. Presently, the law necessarily provides that a prenup will be effective even if it represents a “bad bargain” for one of the parties.

If it is properly drawn and executed, the prenup ousts the jurisdiction of the Family Court and means that the principles of the Family Law Act do not apply.

Those principles of the Family Law Act were designed to support “fair” outcomes relating to financial settlement following the breakdown of the marriage/relationship. Those principles take into account what is to divide, who contributed as homemaker and parent as well as financially, and other significant issues (income, health, earning capacity and so forth).

So when a party to a prenup who has significantly more assets, or whose family has considerably more assets asks the other party, who is not in a financially stable and secure position, to give up the rights those Family Law Act principles provide, it is a really dramatic thing – a huge ask. It is essential for the couple who – let’s face it – just want to be together to work out really how much protection each needs from the other if that’s the purpose of the agreement.

This means that couples who enter into a prenup need to carefully consider the types of assets they may acquire together or individually during their relationship; they need to develop together an appropriate financial plan for their future and consider how best to acquire assets during their relationship and divide them if they separate.

Jurisdiction can be an issue, too, if there are assets overseas. Prenuptial agreements ratified in Australia are governed by Australian law. This means that while the agreement can effectively deal with property within Australia, implementation of the agreement (if the marriage/relationship breaks down) may prove more challenging to manage if there are overseas assets involved. This is the case, however, with Court Orders as well.

For an agreement to be binding, both parties must seek and be represented by an independent lawyer. This can be a costly exercise. It may well, however, prove to be a worthwhile investment given the peace and security that an agreement can provide – especially when compared to the costs of Family Court proceedings.

What does a prenuptial agreement cover?

Katherine: Prenups can include a wide variety of matters. At a minimum, a prenup will include how, in the event of a separation, the parties’ assets and liabilities are to be divided. But they can also include other matters too – many prenups are different. In this way, they are more flexible than court orders.

For example, prenups can include matters about child support (which Family Court Orders ordinarily cannot cover); and conditional arrangements, such as if the parties have a child or plan to have more children in the future, or if a particular event happens or doesn’t happen. A good example of this is when an asset increases or decreases in value in the future.

Who benefits from a prenuptial agreement?

Katherine: Several people would benefit from a prenup.

The most obvious are parties with significant assets. These parties often wish to protect and preserve assets from claims by their partner in the event of a separation. This is particularly relevant for parties entering into a second relationship who want to ensure that their assets are preserved for the benefit of their children, rather than their new partner or the new partner’s children.

Parties who have received significant assets and want to quarantine them, or deal with them in a particular way if they were to separate from their partner, may also find it useful to enter into a prenuptial agreement. The agreement can cover just that unique asset, or it could cover all of the parties’ property. It depends on the specific situation.

How do you discuss a prenup with your partner without it being seen as a lack of faith in a relationship?

Katherine: Nobody takes out home insurance thinking that their house is going to burn down.

In the same way, parties don’t (usually) enter a marriage or relationship thinking it’s going to break down. But a prenuptial agreement can provide an “exit plan” in the event that the “worst case scenario” arises; it’s a plan about how your assets and liabilities will be divided in the event of a separation.

The important thing is if there is no separation, the terms of the agreement are never triggered. In that way, the prenup protects parties from the worst case scenario if their relationship does break down. Another benefit is that parties can enjoy their relationship in the knowledge that they have already discussed the things that are important to them both, and agreed on them in a calm, reasonable environment where they have each been represented by an independent lawyer; each party is motivated to ensure the relationship continues as amicably as possible; and both parties are able to have sensible, level-headed discussions about what should happen if they were to separate.

This helps avoid the emotion, stress, and uncertainty involved with trying to negotiate a settlement if and when the separation occurs.

Obviously, the best way to approach the conversation with your partner will depend on your relationship. Everybody’s relationship is different. It might be helpful to discuss prenuptial agreements in the same way you address other future planning together, for example, planning to make a new Will, plans about moving into together or having children together, and other plans around the significant life changes you expect to occur.

It is helpful to discuss the benefits and the potential disadvantages, of a prenup to each of you. Parties who want to avoid the delay and the lack of control that accompanies Family Court proceedings will probably find a financial agreement attractive.

It is also helpful to consider the other influences that can affect a relationship in the future. There are many stories of relationships that ended badly when well-intended advice from family members and friends influenced decision making and caused more heartaches than help.

Sometimes, the best thing is to simply be prepared.

How can DCH Legal Group assist with prenups?

A financial agreement creates as much certainty as possible as to how assets will be divided if, or after, the marriage or de facto relationship comes to end. DCH Legal Group is experienced in drafting and providing advice with respect to all financial agreements, including prenuptial agreements. For more information on our prenuptial agreement service, view our service page or arrange an appointment.

Note: if you would like to receive or speak to a specialised prenuptial agreement lawyer, please contact the DCH Legal office on 08 9382 8488, or by email at dch@dch.com.au.