In speaking with professionals such as Accountants and Financial Planners, it appears that a view has emerged that there is no utility for clients to enter into Financial Agreements. We often receive comments that Financial Agreements “are not worth the paper they are written on” or that “they are easily set aside by the Family Court” or some variation of the same theme. We beg to disagree.
We are a fan of Financial Agreements because we believe in the hackneyed saying that “an ounce of prevention is worth a pound of cure.” All too often we see separating couples embroiled in protracted litigation costing thousands of dollars not to mention the attendant emotional trauma and stress. As lawyers, we often ask ourselves if there could have been a better outcome if the parties had a Financial Agreement in place? The answer is surely yes.
What basically is a Financial Agreement? If you strip away the legalese, a Financial Agreement is a private contract between parties which sets out their agreement about how their assets and liabilities are to be divided if they separate. A Financial Agreement has the added flexibility in that it can be done at any stage of a relationship for both married and de facto couples. The freedom to contract/agree to whatever the parties is why we are proponents of Financial Agreements.
How did it come about that Financial Agreements acquired a questionable reputation? When the legislation allowing Financial Agreements was introduced about 14 years ago, they were often poorly and carelessly drafted. It is now generally only experienced practitioners who draft Financial Agreements as they require a high level of intellectual rigour, skill, experience and due care. The caselaw has also now evolved to the point where we now have a pretty good idea about which Financial Agreements will be set aside by the Court. Unfortunately, the public perception about Financial Agreements has not kept pace with the changes in the law.
What would be the utility of a Financial Agreement from your client’s perspective? It very much depends on which stage of the relationship they are at.
For parties embarking on a new relationship, the most obvious utility of a Financial Agreement is the ability to quarantine and “protect” assets bought into the relationship. A Financial Agreement forces them to have a conversation about their finances going forward. It helps establish expectations and gives the parties certainty about the management of their finances. We all know that relationships often flounder over arguments about financial issues. Having that conversation early and putting in place a structure about how they will be managing their finances may help parties reduce arguments about finances during their relationship.
The most common reason for a Financial Agreement prepared during a relationship or at the end of a relationship is to divide assets and liabilities in a manner which may not be approved by the Court. For example, the Financial Agreement may not completely sever the financial ties of the parties because it is not in their financial interest to do so. As the Court is mandated to sever the financial ties of the parties at the end of a relationship, it may produce a financial outcome which is not optimal for the parties. A Financial Agreement permits parties to essentially do an “end run” around the Court in a manner of speaking.
Okay you have convinced me about the benefits of a Financial Agreement for my client but how much is this going to cost them? Let us be frank. A properly prepared Financial Agreement is not an inexpensive document to prepare. We do not simply take a precedent and populate the fields. At the risk of stating the obvious, there is no one-size fits all approach. Each Financial Agreement must be tailored to the specific circumstances of the parties and what they want to achieve. This takes time which translates into costs. However, you can assist your client in reducing the costs by providing the solicitor with a summary of what the clients want to achieve and consolidated Balance Sheets (which cancel out any inter-entity loans) for those clients with complex asset structures.
Is it worth reviewing Financial Agreements that have already been signed? In short answer, yes. In our experience, people often sign Financial Agreements and then forget about them. This can be a problem if they then proceed to conduct their financial affairs in a manner inconsistent with the terms of a Financial Agreement. Much like a Will, if a Financial Agreement is no longer “fit for purpose” you cannot simply “vary” the Agreement. The existing Agreement must be terminated and a new Agreement signed.