When it comes to protecting a family’s wealth in the event of separation, financial agreements under the Family Law Act 1975 (Cth) are an increasingly common and effective tool. A financial agreement is an agreement entered into between spouses (married or de facto) which address how the property and financial resources of the relationship are dealt with at separation. If drafted correctly and carefully it enables parties to mutually contract out of the right to bring a claim against each other in the Federal Circuit and Family Court of Australia (the Court). Financial agreements can be made before or during a relationship or after separation.
When can a claim arise?
A party to a relationship can have a claim for property settlement once married or in the case of a de facto relationship once the parties have been living together for two or more years. There are sometimes exceptions to this rule such as the birth of a child or significant intermingling of finances.
A property settlement order from the Court can take into account inheritances received by one party, and can divide the assets inherited.
How does the Federal Circuit and Family Court of Australia treat inheritances?
If there is no financial agreement in existence, inheritances and gifts received by a spouse directly in a relationship are considered to be property of the relationship to be divided as determined by the Court upon separation. Whilst it is certainly not the case that any inheritance is always divided on an equal basis, a Judge has a wide discretion to apportion inheritances having regard to the particular facts and circumstances of the relationship. In the absence of a financial agreement, there is no guarantee that an inheritance will be protected.
How does a financial agreement work?
A typical financial agreement is designed to regulate and determine the impact of separation on the entirety of the parties’ financial relationship (i.e. it deals with all assets and liabilities). A common approach is to divide the assets and interests into each parties excluded assets (kept separate in the event of relationship breakdown), and “joint assets” being those assets which are agreed to be divided in the event of relationship breakdown. There can also be agreed on additional payments from one party to the other, depending on the circumstances.
Alternatively, there is nothing that prevents parties having an agreement that is more limited in scope, such as just excluding claims in relation to inherited assets only. This is known as an Inheritance Protection Agreement (IPA).
The significance and value of an IPA is that it specifically deals with possible or expected inheritances, gifts or particular assets and excludes them for the sole benefit of one of the parties. There is no requirement in the legalisation that the IPA contemplates a just and equitable division of all assets. As long as the IPA is compliant and has been carefully drafted in accordance with the requirements set out under Part VIIIA of the Family Law Act 1975 (Cth) it will be enforceable.
The Federal Circuit Court of Australia (FCCA) case of Wood v Grover [2015] illustrates the enforceability of a financial agreement which quarantines future inheritances. The Husband sought to set aside a financial agreement entered into prior to marriage. The financial agreement specifically sought to protect any inheritances that were likely to be received by either of the parties. At the time of signing the agreement, the Husband had approximately $13,500 worth of assets. The Wife had approximately $656,000 and was likely to receive significant inheritances.
The Husband argued that the financial agreement should be set aside as he had not received the requisite advice regarding the terms of the agreement. The Husband also relied upon the grounds of unconscionable conduct, duress and undue influence. Ultimately, Judge Neville found that the financial agreement was valid and took no issue with the exclusion of significant future inheritances.
Preliminary questions
A financial agreement is a contract, and the Family Law Act 1975 (Cth) requires disclosure as well as prescribing other formalities for the Agreement to be enforceable.
As the parents passing on the inheritance, a preliminary question is the level of disclosure that you are comfortable providing in order to make the agreement binding.
How we can help
At Moores, we prepare financial agreements as well as IPA’s for all types of relationships. As illustrated in Wood v Grover [2015] FCCA, it is imperative the financial agreement is drafted in accordance with the requirements set out in the legislation. Each agreement needs to be carefully tailored to the circumstances of the relationship and immediate families’ requirements.
We are well versed in the approach and negotiation of financial agreements and would welcome a discussion with you or your clients at any time about the benefits of entering into a BFA.
Contact us
Please contact us for more detailed and tailored help.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.