A recent ABC article reported that family lawyers are seeing an increase in requests for Binding Financial Agreements, often driven by concerns about protecting intergenerational wealth and financial assistance provided by the “Bank of Mum and Dad.”

It’s not difficult to understand why.

With property prices continuing to rise, many parents and grandparents are contributing significant sums to help children purchase homes, start businesses or establish financial security. Increasingly, those family members are asking an important question:

What happens if my child’s relationship breaks down?

The Rise of Intergenerational Wealth

For many families, wealth is no longer built entirely from scratch by each generation.

Parents are helping with deposits.

Grandparents are making gifts.

Family trusts are becoming more common.

Inheritance is being received earlier.

As a result, there is growing interest in understanding how those contributions can be protected if a relationship later comes to an end.

One option may be a Binding Financial Agreement.

What Is a Binding Financial Agreement?

Often referred to as a “prenup”, a Binding Financial Agreement is an agreement that allows couples to determine how certain assets will be treated if they later separate.

Importantly, these agreements are not limited to couples who are about to marry.

A Binding Financial Agreement can be entered into:

• Before a marriage;
• During a marriage;
• After separation;
• Before a de facto relationship;
• During a de facto relationship; or
• After the end of a de facto relationship.

In other words, you do not have to be standing at the altar to consider one.

The agreement can identify assets that each party brought into the relationship and set out how those assets will be treated in the event of separation.

This can be particularly relevant where:

• One party owns a home before the relationship;
• A parent has provided a substantial financial contribution;
• One party owns a business;
• A party expects to receive an inheritance; or
• There are children from a previous relationship whose inheritance a parent wishes to protect.

Aren’t Prenups “Not Worth the Paper They’re Written On”?

This is probably one of the most common comments family lawyers hear.  And sometimes it can be true.  A poorly drafted agreement may not withstand scrutiny.

An agreement prepared by someone without appropriate family law expertise may be vulnerable to challenge.  An agreement that fails to properly comply with the legislative requirements may ultimately be set aside.

However, that is very different from saying that Binding Financial Agreements do not work. The reality is that there are many Binding Financial Agreements operating exactly as intended.

The reason these agreements require careful drafting is that they are significant legal documents.

In effect, the parties are agreeing to opt out of the Court determining how their property should be divided if they separate.  Because of that, Parliament has imposed strict requirements regarding how these agreements are prepared and executed.  Parties must receive independent legal advice and the agreement must comply with the relevant provisions of the Family Law Act.

There are also circumstances where agreements may be challenged or set aside, including where there has been fraud, duress, undue influence or significant non-disclosure.

The fact that there are safeguards does not mean the agreements are ineffective. It simply reflects the fact that they are important legal documents.

It’s Not Just for the Extremely Wealthy

There is often a misconception that Binding Financial Agreements are only for millionaires.

That is not necessarily the case.

For some couples, a Binding Financial Agreement will be entirely unnecessary.  If two people begin a relationship with very little and build everything together over many years, there may be little benefit in entering into one.

For others, however, the position is very different.

A person may enter a relationship with:

• A home;
• An investment property;
• A business;
• Significant savings;
• A family trust interest;
• An inheritance; or
• Financial assistance from parents.

In those circumstances, it may be sensible to explore whether a Binding Financial Agreement is appropriate.

What About a Loan Agreement?

Sometimes the issue is not a relationship at all.

Sometimes parents simply want to ensure that money advanced to a child is properly recognised as a loan.  Depending on the circumstances, it may be appropriate to document that arrangement through a formal loan agreement prepared by a commercial lawyer. If parents intend money to be repaid, documenting the arrangement properly from the outset can be extremely important. Without documentation, disputes can arise years later about whether the contribution was intended to be a gift or a loan. Every family’s circumstances are different, which is why obtaining advice before money changes hands is often worthwhile.

The Importance of Fairness When Considering A Binding Financial Agreement

One of the most overlooked aspects of a Binding Financial Agreement is that it should be practical and realistic.  For example, if a couple intends to have children and one parent may become the primary carer, it is worth considering what life might realistically look like if the relationship ends.

Will the agreement leave one party in a position where they cannot reasonably house the children?

Has the future possibility of children been considered at all?

Has there been a significant change in circumstances since the agreement was signed?

Like many forms of risk management, a Binding Financial Agreement should be reviewed if there are major life changes. An agreement entered into before children may need reconsideration after children arrive. An agreement entered into before substantial assets are acquired may need updating as circumstances evolve.

Why Legal Advice Matters

Some couples ask whether one lawyer can simply advise both of them. The answer is generally no.

Binding Financial Agreements require each party to receive independent legal advice. While this can seem inconvenient, it is actually one of the protections built into the legislation. Each person receives advice tailored to their own circumstances and understands the advantages and disadvantages of entering into the agreement.

That independent advice helps strengthen the agreement and reduces the risk of misunderstandings later.

A Conversation Worth Having

No one enters a relationship expecting it to fail. Discussing a Binding Financial Agreement is rarely the most romantic conversation a couple will have. But neither is discussing life insurance, wills or estate planning.

Like those documents, a Binding Financial Agreement is ultimately a form of risk management. For some couples it will be unnecessary. For others it may provide significant certainty and protection.

What is clear is that as the Bank of Mum and Dad continues to play an increasingly important role in helping younger generations build wealth, these conversations are becoming more common than ever before.

And if you’re wondering whether a Binding Financial Agreement might be appropriate in your circumstances, obtaining advice early is often far less expensive than trying to resolve uncertainty after a relationship has already broken down.

Contact Resolve Conflict to discuss whether you need a Binding Financial Agreement or not and how we can help you protect your wealth should yur relationship break down in the future.

Author: Alyson Gale, Partner, Resolve Conflict Family Lawyers and Mediators.