Blended families and second marriages can be challenging; and statistically second marriages are more likely to end in divorce than first marriages.[i] For many people in this situation, often middle aged or later in life[ii], one concern is how can assets be best protected moving towards retirement and/or preserved for the children of the first marriage in the event of separation or death?
The potential claims
The potential claims that might arise from a second spouse/partner are typically those pursuant to the Family Law Act 1975 (“FLA”) with respect to property adjustment/spousal maintenance in the event of relationship breakdown[iii]; or a family provision claim.
A family provision claim is made pursuant to the Succession Act 1981 (“Succession Act”) in the event of death. This might be an issue where there are children from a first marriage who benefit under the will. A family provision claim is against the estate and arises if the deceased spouse does not make adequate provision in the will for the surviving spouse.
The difficulty for clients with respect to the above is:
- High costs of family law litigation in the event of dispute; or high legal costs for the estate in family provision litigation;
- These types of claims involve discretionary remedies which creates a degree of uncertainty as to the outcome;
- Acrimonious dispute between spouses/partners; or between the children of the first marriage and spouse/partner.
What protection can the law offer?
Methods of asset protection such as via corporate or trust structures are of little assistance in the family law arena.-It is well settled that the real issue for the court in determining whether the matrimonial property pool ought to be expanded by trust or corporate assets is control.[iv]
Thus the court can look behind the veil and determine whether the facts and circumstances support a conclusion that assets ought to be included as “matrimonial property”.
Since 2000 (and 2009 for defacto couples) changes to the FLA make it possible for persons contemplating a relationship/marriage; or in a relationship/marriage; to contract out of the property adjustment/spousal maintenance provisions by entering into a Binding Financial Agreement.
What is a Binding Financial Agreement?
A Binding Financial Agreement is a Financial Agreement that is binding because it has met the formal requirements of the FLA necessary to make it binding.[v]-Where a Financial Agreement is binding, it removes the jurisdiction of a court to make a property adjustment or spousal maintenance order.[vi]
Thus the Binding Financial Agreement can specify matters such as how property is to be distributed, whether property brought to a relationship is to be retained or quarantined out of the property pool available for distribution, whether spousal maintenance is payable and the extinguishment of future spousal maintenance claims.
Third parties can be parties to Binding Financial Agreements and thus inter entity transfer of property is possible as well as making allowances for loans from family members etc.
What happens to a Binding Financial Agreement when a party to the agreement passes away?
A Binding Financial Agreement operates despite the death of a party and is binding on the personal representative of a party.[vii]
Opinions are divided however as to whether a Binding Financial Agreement for married couples becomes operative upon the death of a party. The significance of this would be to allow the Binding Financial Agreement to be used as a succession planning tool i.e. the Binding Financial Agreement would specify what joint property (or even property in the name of the surviving spouse) would fall into the deceased estate upon the death of a party pursuant to the Binding Financial Agreement.
The arguments for and against concern the wording of a number of sections[viii] (see endnote for explanation and why I think Binding Financial Agreements have force and effect on death) however there may be other provisions included in a Binding Financial Agreement that make a Binding Financial Agreement useful as a succession planning tool and protect against a family maintenance provision claim.
Binding Financial Agreements and family provision claims
Apart from the Binding Financial Agreement potentially being used to include or exclude assets from an estate, there is also potential to use the Binding Financial Agreement to “contract out of” the family maintenance provisions of the Succession Act.
In this respect the Binding Financial Agreement cannot remove the jurisdiction of the court to make an order because the Succession Act is Queensland legislation while the FLA is Federal legislation. Nevertheless a provision in the Binding Financial Agreement to the effect that neither party shall make a claim on the estate of the other, while not binding on a State Court, may represent important evidence of the intention of the parties and with respect to what “family provision” was considered adequate by the parties. This was the case in Queensland in Hills v Chalk & Ors (as executors of the estate of Chalk (deceased))  QCA 159–where the court said at 46:
“In this case, the voluntary statement of the parties of their mutual intentions and expectations in a form intended to be binding affords a reliable conspectus of the totality of the relationship of the parties and of their respective relationships with others who have a claim on their bounty. In my opinion, the court should have regard to such a voluntary statement by the parties of their intentions and expectations…”
Further, in other jurisdictions the succession laws have been amended to permit parties to contract out of family maintenance provisions. For example, section 95 of the NSW Succession Act 2006 provides a person may contract out of/release their rights to a family provision order[ix]. A clause can be inserted into the Binding Financial Agreement in contemplation of the succession law in Queensland being amended to allow for a similar provision.
Getting a Binding Financial Agreement?
Some people may argue that a Binding Financial Agreement in contemplation of marriage or “pre nuptial agreement” is unromantic or demonstrates a lack of commitment. Maybe…but having this discussion at a time when both parties are in love and looking to the future could also be said to be a preferable time to negotiate what is fair as opposed to during the period of emotional turmoil at the end of a relationship.
For people with children to another relationship and assets hard earned it makes sense to obtain the best protection the law can offer.
For people wanting to leave behind a legacy to children and others, rather than leaving behind court battles and an estate ravaged by legal costs, a Binding Financial Agreement can offer more certainty and protection for loved ones. Many lawyers will understand that often claims such as family provision claims may be settled and paid out even if they are without merit simply to avoid the legal costs of defending them.
The Binding Financial Agreement doesn’t have to be entered into at the start of the relationship; it can be made during and even after the relationship has broken down.
Binding Financial Agreements are very helpful provided they are created by a skilled lawyer. Strict legislative requirements are necessary to make them binding and in some circumstances they can be set aside.
Two idioms best capture the essence of Binding Financial Agreements, they are: a stitch in time save nine but a chain is only as strong as its weakest link.
[i] Australian Institute of Family Studies
[ii] 2011 Census data show that in 2011 the median age in Australia for males to become separated was 40.8 with divorce occurring at 44.4 while for females the median age for separation was 38.1 and 41.5 for divorce.
[iii] Since 1 March 2009 most de facto couples in Queensland separating after that date are able to seek remedies pursuant the Family Law Act 1975 which are in most respect the same as those available to married couples.
[iv] Deputy Commissioner of Taxation v Austin (1998) 16 ACLC 1,555; and Coventry, Coventry and Smith (2004) FLC 93-184.
[v] See sections 90G and 90UJ FLA.
[vi] See sections 71A and 90SA FLA.
[vii] See sections 90H and 90UK FLA.
[viii] Section 90H and 90UK are mirror provisions for married and defacto Binding Financial Agreements (“BFA”) except that the s.90UK provision contains a note which reads, “If the parties are still in the defacto relationship when one of them dies the de facto relationship is not taken to have broken down for the purposes of enforcing the matters mentioned in the financial agreement. Because section 90H doesn’t have a similar note it could be argued it is intended to mean death constitutes relationship breakdown for the purposes of the BFA. The difficulty with this is sections 90B(2) and 90C(2) refer to marriage “breakdown” which the definition in section 4 provides “in relation to a marriage, does not include a breakdown of the marriage by reason of death”.
The above would seem to put the matter beyond issue except for sections 90DA(1) and 90DA(1A). Section 90DA(1) requires that upon marriage breakdown, a BFA has no force or effect until a party signs a separation declaration. Section 90DA(1A) provides that section 90DA(1) does not need to be complied with if either or both spouses die. The note to section 90DA(1A) goes on to say:-“This means the financial agreement will be of force and effect in relation to the matters mentioned in subsection (1) from the time of the divorce or death(s)” (my emphasis). Thus the section clearly indicates a BFA has force and effect from the time of death.
In further support of this idea is section 90B(3)(b) and 90C(3)(b). This section provides that the BFA may contain “other matters” i.e. other matters in addition to how in the event of breakdown the property, financial resources and spousal maintenance is dealt with. It is submitted “other matters” might refer to how in the event of death the property, financial resources and spousal maintenance is dealt with.
A BFA is not terminated by death. Section 90J provides a BFA can “only” be terminated by including a terminating clause in a subsequent BFA (as referred to in sections 90B, 90C and 90D) or by making a “terminating agreement”. Therefore if the BFA is still operative, the surviving spouse could choose whether to sign the separation declaration in section 90DA(1) and give the BFA “force and effect”. Presumably this is why section 90DA(1A) was inserted and in my view gives further weight to the argument that BFA’s have force and effect on death of a party.
[ix] The release of rights to a family provision order in NSW requires the courts approval and other findings with respect to advantage to the releasing party; that it was prudent, fair and reasonable; and the releasing party had independent advice.
Peter Hooper – Hooper Mill Family Lawyers – We are family lawyers in Brisbane. Find us searching family lawyers Brisbane; divorce lawyers Brisbane; family lawyer Brisbane; Brisbane family lawyers; family law solicitors Brisbane; divorce lawyer Brisbane; family law lawyers Brisbane; divorce solicitors Brisbane; divorce lawyers in Brisbane; best divorce lawyer Brisbane.