Tag Archive: binding financial agreements

  1. Sexually Transmitted Debt

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    Sexually Transmitted Debt

    New relationships often carry the excitement and anticipation of discovering what hopefully will be rich mix of many common interests and values combined with admirable differences. However sometimes, along with all of the positives, comes the shock discovery that the new man or woman is riddled with debt! Whether the new partner’s financial troubles are sourced from a one-off past misadventure or a healthy (and ongoing) appetite for overspending, resolution of the debt situation will obviously become a shared problem if the relationship is to continue.

    For the partner who is asset positive, there is an understandable trepidation, about how they might protect themselves for the other partner’s liabilities, particularly if the relationship was to eventually breakdown and the couple choose to separate.

    Here there is a combination of good and bad news.

    The good news, is that the mere formation of a relationship (even a formal marriage) does not automatically result in the debts of one spouse becoming a joint liability between the couple. Consequently even if the couple stay together, the creditors of one spouse cannot pursue the other spouse’s assets for repayment of the debts*. Also, if the couple do separate at some time after the original debts are paid off, the past asset negative position of the debt ridden spouse may result in the other spouse (who was originally asset positive) being able to retain a much greater share of the present day asset pool.

    The bad news however is that if the couple were to separate before the asset negative spouse’s liabilities have been paid off and the couple have subsequently acquired some other assets, the Family Law System prohibits the division of the other assets in any way that might result in creditors being left unpaid. Consequently, if one spouse puts $50,000.00 of his/her own cash into the purchase of a jointly owned home but the other spouse still has a personal credit card debt of $20,000.00, the  Court might order the credit card to be paid off out of the $50,000.00, with the result that the debt riddled spouse leaves the relationship debt free and the asset positive spouse leaves $20,000.00 the poorer! Orders of this sort are not automatic and there are other ways to defend against the threat   but it is definitely a risk to bear in mind for anyone taking on a partner with heavy liabilities in tow.

    * this assumes the asset positive partner has not subsequently refinanced  the debt into joint names or given a personal guarantee for the debt. 

  2. Divorce – Property Division

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    IS IT NECESSARY TO DOCUMENT THE PROPERTY DIVISION DEAL?

    When a couple decides to separate, decisions of course must be made about the division or disposal of assets and liabilities. For some, the stakes and/or the emotions run so hot and high that nothing can be resolved without the assistance of Lawyers and Courts. For others, the mutual desire to keep things dignified and amicable can mean that they are able to work out how the division should be done without the need to consult a Lawyer at all. For the couples who are able to separate cooperatively therefore, the question begs, do we need to have anything documented at all and if so what are the options?

    Generally, there are at least four reasons why formal Family Law documentation should be prepared and as for the documentation options, there are three choices to consider:

    • Reason #1 – No come back – Once proper Family Law documents are prepared and executed, each spouse is free to go off and live their life (make or break their fortune etc) without the need to be constantly looking over their shoulder in fear that their former partner might change their mind and start the legal processes for a re-division of the assets on more advantageous terms.
    • Reason #2 – Enforceability With proper documentation, both spouses are locked into the deal meaning neither can subsequently refuse to carry through with the required transactions (sale of the home, payment of money etc) nor suddenly introduce additional demands (more money etc) in return for their continued cooperation to carry out the terms of the deal.
    • Reason #3 – Stamp Duty Exemptions and Capital Gains Tax (CGT) Rollover – If the family home or an investment property is to be transferred into one spouse’s name alone, that transfer is stamp duty free (saving $000’s) if it is done pursuant to a recognised Family Law Agreement. CGT is not charged on the transfer/sale of personal residences but for investment properties, even a transfer between the spouses will trigger an immediate obligation for payment of CGT (which can run to $000’s) if there is no recognised Family Law Agreement in place*.
    • Reason #4 – Superannuation SplitsIf the deal involves one spouse transferring part of their personal accumulated superannuation account to the other spouse, that transfer can only happen if authorised by proper Family Law documentation.

    *Importantly though, the tax liability carries forward with the property (it is not zeroed out) and consequently will still be payable if/when that property is subsequently sold at any time in the future.

    When it comes to documenting a Family Law property settlement deal, there are three choices:

    • Choice #1 – Family Court Consent Order – Using a specialised application form, the two parties can write down the terms of their deal into a document expressed to be a “Consent Order” and then place it before the Court for approval. The Court will not automatically approve the deal unless convinced that the settlement is roughly in line with what the Court would have ordered anyway.  A “Solicitor sign off” on the documents is not mandatory, but without it, the Court itself will take a much closer look at the matter and is more prone to reject or requisition the Orders if it finds irregularities or cause for concern.  The time frame of obtaining the Court’s approval does vary, but generally the Orders are returned with Court approval within 2 – 4 weeks.
    • Choice #2 – Binding Financial Agreement (BFA) – Unlike Consent Orders, BFA’s are not filed in or approved by the Courts and therefore they do allow scope for the parties to be more flexible with the deal they wish to strike and how it is to be carried out. In a default scenario, the BFA can be registered in the Court which upgrades the terms to the equivalent of Court Orders, but the Courts cannot be forced to enforce the Orders if the Court doesn’t like the BFA’s terms. When the BFA has been properly thought out and drafted, the risk of non-enforcement is slight to non-existent, but nonetheless for this reason some Lawyers do refuse to use them. Two big advantages with BFA’s are cost and speed. Generally, BFA’s are around 30%- 50% cheaper to prepare than Consent Orders and are binding/active as soon as they are signed compared to the 2 – 4 week waiting time required for Consent Orders. With BFA’s however, a Solicitor’s sign off (that is an independent Solicitor for each of the parties) is mandatory, such that the Agreement is completely unenforceable and invalid if this is not done.
    • Choice #3 – Divorce and wait – Under Section 44 of the Family Law Act, upon the expiration of one (1) year from the date of a divorce (for married couples) or the expiration of two (2) years from date of separation (for de facto couples) the power given to Family Court Judges to deal with a Family Law dispute is extinguished. Accordingly, if the assets are already divided or the parties are very confident they can do so voluntarily without having to rely on an Order/BFA for enforcement, the parties can simply leave the assets where they stand, or carry out the transactions and then apply for the divorce/wait out the 2 years after which time ownership of the assets will effectively stand where they fall. This option however will not carry the CGT rollover relief which is available under a BFA  or a Consent Order. Stamp duty exemptions can still be claimed for married couples if the property transfer is delayed until a Divorce Order is obtained or at least applied for, but this is not available for defacto couples. A further risk/problem with this strategy is that the extinguishment of the Family Court’s power mentioned above is not absolute. Even after the 1-2 year period has expired, either party can apply to the Family Court for permission to commence proceedings out of time and, in appropriate cases that permission will be given.

    Michael Zande is a Queensland Law Society Accredited Family Law Specialist with over 25 years’ experience in the field. He is the principal at Zande Law Solicitors, Suite 7, Norwinn Centre, 15 Discovery Drive, North Lakes.  To contact Michael for advice, phone 3385 0999.

    The information in this article is merely a guide and is not a full explanation of the law.  This firm cannot take responsibility for any action readers take based on this information.  When making decisions that could affect your legal rights, please contact us for professional advice.

  3. Pre-Nuptial Agreements

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    Pre-Nuptial Agreements or “Pre-Nups” is a term that has grown out of the American Family Law system. These Agreements are made between intact (married/defacto) couples but which state how their assets are to be divided in the event of a future separation.  In Australia they are known as Binding Financial Agreements or BFA’s for short. The Agreements can be made either before or after the relationships begins.

    By signing a BFA, the relevant couple invoke provisions in the Family Law Act which remove the power of a Family Court Judge to decide how their assets should be   divided in the event of a separation and instead specifically and expressly prescribe how their assets will be divided according to the terms of their Agreement.

    There can be many advantages in preparing a BFA but the main one is that it allows the couple to avoid a one size fits all outlook which comes from the provisions of the Family Law Act (as applied by Family Court Judges) and instead allows the couple to come up with their own rules about what might be a fair property division between them.

    Other advantages of BFA’s are that they eliminate all of the cost and risk that typically surround a relationship breakdown. The costs typically centre on hiring the lawyers which can be anywhere from $3,000 to $120,000 for a standard case and as for risks, the fact that we have an Appeal Court is proof that Judges do get it wrong often and even when Judges get it right, high toxicity levels between spouses at the point of separation can sometimes provoke an “all or ashes” attitude.

    If the Agreement is to be legally binding however, there are a number of very important technical requirements that must be satisfied. If not, the BFA will be invalid and unenforceable unless a Court subsequently rules that any noncompliance can be excused.

    Couples who typically are attracted to BFA’s are persons who are going into second or third marriages/relationships where each person is independently financially secure, neither would need to have recourse to the other person’s assets in order to support themselves in a future separation scenario and both typically also have children to previous relationships for whom they would seek that their assets be provided for exclusively. Another category of cases is where one member of the new couple holds significant wealth whereas the other person has only minimal assets.

    Typically, BFA’s are drafted for simplicity and will expressly identify the assets which each member of the couple brings into the relationship stating that those assets are then to be retained by that person at the end of the relationship. Some couples however do not have the luxury of being able to keep all of their finances completely separate and consequently find themselves needing to pool their assets into the joint purchase of a home and/or some co-borrowings.  Inevitably, these arrangements have many different combinations and permutations and can include, unequal cash contributions, or even a situation where the “cash” contribution from one spouse is sourced from a bank loan which is to be secured against the property and jointly guaranteed by both spouses.  A well drafted BFA that considers all the “what ifs” can still stretch to accommodate these arrangements.

    An important feature of the Agreements is to note that they remain permanent and binding and cannot ever be terminated unless both spouses go through the process of preparing a “Termination Agreement” which must cover exactly the same protocols as creating the Pre-Nup in the first place.  It is therefore for example not possible for the spouses to simply agree to “tear the Agreement up” between themselves.  This feature is important to understand because even if the Agreement is considerably unfair by one party, it will remain binding upon that party no matter how long the parties remain together.

    Even in situations where the parties might be entering into an Agreement which at some stage in the future might be considered to be unfair, there are some strategies that can be used. For de facto couples, for example, the current law states that if the couple is to marry, the act of marriage automatically revokes the Agreement.  The parties therefore have the ability to terminate their Agreement without having to go to the expense of preparing a “Termination Agreement” by simply entering into a formal marriage.  In other cases, the Agreements can be drafted with what is known in commercial contracts as a “sunset clause”.  This means that the Agreement for example, could be stated to self-terminate after a designated period of say 7 years (or shorter or longer periods depending upon the couples’ particular preference).

    Other features which can be included into the Agreements are parallel agreements that prevent either couple from challenging their respective estates should one or other die unexpectedly. The drafting of an agreement in this area again, however, is very technical and should not be attempted by persons who are not thoroughly trained in undertaking this style of work.

    A well drafted Agreement therefore is certainly very much “worth the paper it is written on”.  However, when it comes to BFAs, only properly credentialed Solicitors who are well practiced in doing this type of work should be engaged.

    Michael Zande is a Queensland Law Society accredited family law specialist with over 25 years experience in the field. He is the principal at Zande Law Solicitors, Suite 7, Norwinn Centre, 15 Discovery Drive, North Lakes.  To contact Michael for advice phone 3385 0999.

    The information in this article is merely a guide and is not a full explanation of the law. This firm cannot take responsibility for any action readers take based on this information. When making decisions that could affect your legal rights, please contact us for professional advice.