How do Pre-Nuptial Agreements really work?

Many people seem to associate “pre-nups” with celebrities. However entering into pre-nups (known more formally as Financial Agreements) is now becoming increasingly common for couples who are marrying or living together in second or third relationships or where one of the couple has already accumulated substantial assets which they wish to protect if the relationship breakdown in the future.

When prepared properly and if the technical requirements are met, a Financial Agreement ousts the jurisdiction of the family law courts to make an order under the property settlement or spousal maintenance provisions of the Family Law Act 1975 (Cth) (“the Act”) about the financial matters to which the agreement applies.

 How does a Financial Agreement typically operate?

An agreement entered into prior to marriage or a de facto relationship or during it (but prior to separation) will provide how, in the event of breakdown of their relationship, the property of either or both people are to be dealt with.

The terms of each agreement are specifically tailored to meet the objectives of the couple involved given their particular circumstances.

Typically, the following issues are addressed:-

  1. The agreement may provide that assets identified as pre-existing property of a party will remain free of any subsequent claim for division by the other party as will any appreciation in the value of the asset, income derived from an asset or the proceeds of sale of an asset.
  2. The responsibility for the payment of any expenses or liabilities in relation to the assets that remain as separate property must be met by that party from their own resources.
  3. Superannuation and other financial resources such as long service leave may need to be detailed and included in the schedule of assets (as their value at the date of the agreement may also remain the separate property of that party).
  4. Depending on the specific objective of the client, property acquired after the marriage or the commencement of the de facto relationship will usually be considered “joint property” subject to the source of funds used in the acquisition.
  5. Typically, the terms of the Agreement provide that a party use separate property towards the purchase of any further separate property or may use separate property towards the purchase of joint property. If separate property is used towards the purchase of jointly owned property, an acknowledgement and documentation of the same should be entered into.  All other assets should be well documented for tracing purposes.
  6. In the event of a separation, jointly owned property acquired by the use of separately owned property will generally be available for distribution between the parties after the value of the separate property is deducted and accounted to the party contributing the separate property.
  7. Depending on the specific objectives of the client, often any future inheritances, gifts or windfalls will remain the property of the party who receives the same.
  8. If a third party, including any person or other legal entity, contributes towards the acquisition of a jointly owned asset, that contribution should be properly documented and clearly acknowledged for example as either a gift or as a loan. If the contribution is to be regarded as a gift to one party and not to both parties, that proportion of the jointly held property will be regarded as the separate property of the party to whom the gift has been made.  If the contribution is made as a gift to both parties there is no need to consider the gift as separate property.
  9. Under the agreement any liabilities and debts of a party at the time of the marriage remain that party’s responsibility. Any debt incurred during the marriage without the other party’s consent remains the sole responsibility of the party concerned.  Jointly incurred debts are a joint responsibility.

Whilst there has been some considerable uncertainty over several years, as a number of cases have challenged the validity of the provisions in the Family Law Act in relation to Financial Agreements, the Agreements remain effective tools for many couples, particularly where they are marrying for the second time or entering marriage later when they have already accumulated assets.

Whether a pre-nup is an appropriate asset protection measure will depend on the individual circumstances of the couple involved. As there are very specific requirements which need to be met for a pre-nup to be an effective asset protection strategy it is imperative that each party seeks independent legal advice from a specialist family lawyer well in advance to ensure that all the requirements are met and independent legal advice is received.

How can I help? 

I regularly assist clients to make Financial Agreements in contemplation of marriage or in contemplation of or during a de facto relationship.  At Phillips Family Law my colleagues and I regularly work with estate planners and financial planners to ensure a complimentary approach to asset protection strategies by these professionals for our clients.

If you are interested in exploring whether a Financial Agreement is suitable to your circumstances or if you have a client who is entering into a new relationship and wishes to explore if they may benefit from a Financial Agreement, don’t hesitate to contact me at Phillips Family Law.

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