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Financial Agreements: how to make sure you sleep at night

• The basics of the Financial Agreement

• Some interesting uses

• Some terrifying cases

• Some suggestions for best practice

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A reminder about why clients ought to be interested in Financial Agreements

• Property settlement principles

• What comprises the pool of assets?

• How is the division of assets worked out?

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What is in the matrimonial pool of assets?

• Section 79 of the Family Law Act 1975 empowers the Family Court to make orders with respect to property

• ‘Property’ is an expanding concept in the eyes of the court

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What is in the matrimonial pool of assets?

• It is a myth that the following assets are automatically excluded from the matrimonial pool:

º inheritances or giftsº assets brought in by one spouseº assets held in the names of companies,

partnerships, trusts and third parties or by one spouse only

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Section 79 Property Settlement – Four Step Process + maintenance

1) Value matrimonial assets

2) Compare financial and non-financial contributions of spouses

3) Assess each spouse’s future needs – Section 75(2) Family Law Act

4) Is the outcome produced just and equitable?

• Assess need for spousal maintenance – Sections 72 and 74

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Contributions and size of pool

• No presumption of equality of contribution (although 50/50 division is often the outcome after a long marriage)

• Extraordinary or entrepreneurial contributions – perhaps some additional weight where the pool of assets is very large – matter of fashion

• In the past, the smaller the pool, the more the non-business spouse likely to receive – again social trends changing here

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FINANCIAL AGREEMENTS

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General overview of financial agreements

• Four types for the marrying kind

º Financial agreements made prior to marriage under Section 90B

º Financial agreements made during a marriage prior to separation under the first limb of Section 90C

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General overview of financial agreements

• Financial agreements made during a marriage but after the parties have separated under the second limb of Section 90C

• Financial agreements made after divorce under Section 90D

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FLA de facto agreements

• From March 2009, de facto couples have been able to enter into financial agreements under the FLA as follows:• prior to a relationship — S9OUB;• during a relationship but prior to separation —

S9OUC; and• after separation — S9OUD.

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Requirements for a binding financial agreement post 4/1/10 • Subject to subsection (1A), in order for a financial

agreement to be binding upon the parties, it must meet the following criteria under section 90G:

(a) The agreement is signed by all parties;

(b) Before signing the Agreement, each spouse party was provided with independent legal advice from a legal practitioner about:

- The effect of the Agreement on the rights of that party; and

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Section 90G from 4/1/10- The advantages and disadvantages,

at the time the advice was provided, to that party of making the Agreement; and

(c) Before or after signing, each spouse party was provided with a signed statement by the legal practitioner stating that the advice had been given (need not be annexed);

(ca) A copy of the signed statement must be given to the other party or their legal practitioner;

(d) The agreement has not been terminated or set aside by a court.

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Section 90G(1A)(1A) A financial agreement is binding on the parties

to the agreement if:a) the agreement is signed by all parties; andb) one or more of paragraphs (1)(b), (c) and (ca)

are not satisfied in relation to the agreement; and

c) a court is satisfied that it would be unjust and inequitable if the agreement were not binding on the spouse parties to the agreement (disregarding any changes in circumstances from the time the agreement was made); and

d) the court makes an order under subsection (1B) declaring that the agreement is binding on the parties to the agreement; and

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Section 90G(1A) cont’d

d) the agreement has not been terminated and has not been set aside by a court.

(1B) For the purposes of paragraph (1A)(d), a court may make an order declaring that a financial agreement is binding on the parties to the agreement, upon application (the enforcement application ) by a spouse party seeking to enforce the agreement.

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Section 90G

(1C) To avoid doubt, section 90KA applies in relation to the enforcement application.

(2) A court may make such orders for the enforcement of a financial agreementthat is binding on the parties to the agreement as it thinks necessary.

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Effect of an Agreement on the rights of parties• Spouses are unable to apply to the Court for

property settlement or spousal maintenance contrary to the provisions of the financial agreement

• Two exceptions to this principle –º Centrelink recipients - if one party can establish

that at the time the Agreement came into effect they were unable to support themselves without an income-tested pension or benefit, the party can apply to the Court for a maintenance order

º Successful application using a ground under s.90K to set aside a financial agreement

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Setting aside financial agreements

• Grounds upon which financial agreements may be set aside – Section 90K:

º the agreement was obtained by fraud including non-disclosure of a material matter

º the agreement is void, voidable or unenforceable

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Grounds for setting asideº in the circumstances that have arisen since the

agreement was made it is impracticable for the agreement or part of the agreement to be carried out

º since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage) as a result of which the child or the parent who has care and responsibility for the child will suffer hardship if the court does not set the agreement aside

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Grounds for setting aside

• in the making of the financial agreement a party to the agreement engaged in conduct that was in the circumstances unconscionable

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Grounds for setting aside

• a payment flag is operating on a superannuation interest covered by the Agreement (with no reasonable likelihood that the flag will be terminated by agreement under the Family Law Act)

• the Agreement covers at least one superannuation interest that is worth under $5,000 and is therefore unsplittable for the purposes of the Family Law Act

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General issues to be conscious of regarding Agreements• full and frank disclosure requirement – be very careful• continue vigilance with the versions of the agreement,

especially as that pertains to disclosure Fevia and Carmel-Fevia: wife’s version of the agreement signed shortly before wedding did not have the schedule of business assets attached – no agreement found to exist

• can be limited to 1 asset or a category of asset or cover the field

• can protect a client’s interest in a trust, company or 3rd party investment

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General issues to be conscious of regarding Agreements: bankruptcy

• Transactions completed under a Financial Agreement are protected from the Trustee in Bankruptcy, subject to anti-avoidance measures

• An Agreement can be set aside if it was entered into by either party to defraud or defeat a creditor (or with reckless disregard of the interests of a creditor)

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Practical advantages of Financial Agreements

• Can be used to protect/quarantine all or some of the assets from the other spouse – especially initial contributions made at the commencement of the relationship

• Privacy and can be speedier than court for separated couples

• Offer asset protection against spouses, third parties, creditors (subject to anti-avoidance provisions)

• Agreements confer stamp duty and CGT relief, subject to certain exceptions, for separated couples

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Most common use

• Estate planning and asset protection for:

• High net worth clients (perhaps only when compared with their spouse)

º Those not marrying for the first time

º Clients with children/obligations from a previous relationship

º Parties in family or intergenerational enterprises

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What Agreements can contain

• Sliding scales or formulas of property and maintenance entitlements based on length of marriage, number of children etc

• Pet maintenance payments following separation

• Champagne, white wine and red wine division

• Sunset clauses with provision for regular reviews

• Confidentiality clauses

• Interlocking provisions with collateral loan agreements

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27Disadvantages – depending on whom you are acting for

• Financial agreements cannot be varied or updated – they must be terminated and a fresh agreement executed

• May not reflect the entitlements the parties would be awarded by a Court

• Section 90B and 90C (limb 1) agreements can cause difficulty in the relationship

• Problematic to alter decisions retrospectively – against whom is most protection sought?

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One important disadvantage

• The poor lawyers

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The changing nature of ‘binding’• J and J 2006 Fam CA 442 old wording of certificate

of independent legal advice used and not replicated in the body of agreement

• Under the old version of Section 9OG, a Financial Agreement could only be binding if the original Agreement was given to one of the parties and a copy given to the other. Fevia and Carmel-Fevia 2009 Fam CA 1101 Agreement found not to be binding beacause a copy of the Agreement was not provided within a reasonable time. Wife only became aware of the existence of the business asset schedule attached to the husband’s copy when he instituted court proceedings.

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Changing nature of ‘binding’

• Black and Black 2008 FLC 93-357 – annexed certificates but not the body of agreement mirrored Section 90G - a strict compliance test with respect to technical requirements for binding

• Gardiner & Baker 2009 FMCA fam 1029 – reference to ‘disadvantages’ did not appear in the recitals about the advice given

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Post 4/1/10

• An agreement can still be binding even if the new Section 90G requirements not met if the court remains satisfied that it would be unjust and inequitable if the agreement were not binding – S90G(1)(A)

• Changes in circumstances since the Agreement executed dealt with under Section 90K not by a finding under 1A.

• For example the advice need not necessarily be contained in the Agreement or certified in an annexure to the Agreement.

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Who may sign the certificate?

• In Ruane and Bachmann-Ruane & Anor, the Financial Agreement signed by the parties was held not to be binding due to one of the certificates of legal advice having been signed by an English lawyer. Although this case was determined prior to the January 2010 amendments, do not assume any change

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Effect of changes

• Retrospective effect for all agreements signed after 27/12/00

• Note however that that pre 2004 agreements required parties to be given advice about 2 additional matters (prudence and the fair and reasonable test in light of reasonably foreseeable circumstances)

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34What to ensure you have covered now technical requirements less fatal

• The Financial Agreement must be "expressed to be made" under the relevant Section: Ruane and Bachmann Ruane & Anor 2009 Fam CA 1101

• If it is not addressed in the Agreement, jurisdiction is not ousted. Kostres and Kostres 2009 Fam CAFC 222 (trust assets)

• Try to reflect the mutual intentions of the parties – history described in the recitals. Kostres Parties wrongly believed the husband was still bankrupt and put all the assets in the wife’s name/her trust.

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What to ensure you have covered now technical requirements less fatal cont’d

• On separation, wife sought to retain all of them although husband had contributed borrowings/payments. Agreement found too ambiguous and remitted for rehearing.

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Content of the agreement

• If attempting to exclude spousal maintenance do not write "nil" because it might be void:

S90E "A provision of a financial agreement that relates to the maintenance of a spouse party to the agreement or a child or children is void

unless the provision specifies:a) the party, or the child or children, for whose

maintenance provision it is made; and

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Spousal maintenance provisions

b) the amount provided for, or the value of the portion of the relevant property attributable to, the maintenance of the party, or of the child or each child, as the case may be.“

Adamidis and Adamidis 2009 FMCA fam 1104

- No Section 90E provision excluding spousal maintenance in the body of the agreement only in a recital, which was severed and the husband permitted to apply for spousal support

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Substantive provisions

• Definitions of separate, joint property etc

• How determined – title, contributions, record keeping?

• Clarity as to structures, inheritances, tax losses

• Substitution clauses

• Occupation of home at separation clauses

• Separation declarations – annexed or protocol included

• Sale, valuation, transfer and retention clauses

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Separation declarationsS9ODA to the Act provides that a Binding Financial

Agreement will be "of no force or effect unless a separation declaration is made".The declaration:º may be included in the Financial Agreement to

which it relates.º must be signed by at least one of the parties.º must state that:

- The parties have separated and are living- separately and apart at the time that the

declaration was made.- In the opinion of the party (parties) making the

declaration, there is no reasonable likelihood of cohabitation being resumed.

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Superannuation agreement provisions

• Although not required specifically give the trustee procedural fairness (perhaps whole agreement?)

• Beware amicable parties who have reached an Agreement prior to 12 months of marriage – of the balance is in excess of "the low rate cap amount" for the income year – split not permitted until 12 months separation

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Letter of advice

Should address:-

• the operation of the Agreement, i.e.. what is proposed

• the advantages of signing the Agreement;º the disadvantages of signing the Agreement;º the effect of that Agreement upon the client's

rights (including S90K and S90E); andº any proposed amendments to the Agreement

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De Facto Agreements

• S9OUJ mirrors new S9OG and has same retrospective effect.

• The Agreements must be made between parties who are ordinarily resident in participating jurisdictions [S9OUA] excluding WA and SA.

• The separation declaration is required if any Financial Agreement is to be of force or effect. The declaration must also state in addition to the matters outlined in S9ODA, that "the parties lived in a defacto relationship" under S9OUF.

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De Facto Agreements cont’d

• Agreements made under, for instance, Part 19 of the Property Law Act (Qld) prior to the 1 March 2009, will be deemed to be Financial Agreements provided that:

- The parties did not separate prior to 1 March 2009;

- The stated agreement in effect complies with the relevant Family Law Act provisions eg provision of statement of legal advice, etc.