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Are financial agreements risky?

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We get calls each week from customers wanting to make prenuptial and other financial agreements. Often they have shopped around and can’t understand why they are being quoted costs sometimes as high as $10,000 or $20,000.

Your quote may have been significantly less than this, but there is a reason for the disparity.

are financial agreements risky

Even though some legal professionals consider Financial Agreements to be risky (mainly due to any future liability they may face), the Family Law Act have provided financial agreements as a tool to keep people out of the court system.

There is a level of concern among the legal profession that financial agreements are risky instruments.  This concern is particularly directed at those agreements that do not come into effect immediately, but rather, at a later point in time when there is a breakdown of the relationship (ie. pre nuptial agreements or agreements made during the course of the relationship).

If we use the example of a couple who are planning on getting married, a prenuptial agreement entered into today, may never be needed, or it may not be called upon until many years later.  That is because the agreement will not come into effect until after the relationship has broken down and this could be 5, 10 or even 20 years down the track.  At that point, circumstances may be completely different than originally contemplated or anticipated by the parties, and if either party is unhappy with the terms they have previously agreed to, they may decide to make an application to the court to have it set aside.

Even though the parties have agreed to the terms of the agreement as a substitute for court action, they still have the option of asking the court to set aside the agreement in limited circumstances.  These circumstances are listed in section 90K of the Family Law Act.  If such a challenge is successful (and remember, you must have a valid reason to challenge the agreement), the solicitor who provided the original advice is usually the easiest target to attribute the blame, and bear the brunt of the dissatisfaction of the party who was seeking to rely on the agreement.

So here’s the rub.

Some lawyers won’t draft financial agreements because they believe the risks are too high (for themselves, not you) and consequently those who have a higher appetite for risk charge a premium, often in direct proportion to the depth of the pockets of the client.  That is, the greater the wealth of the client, the higher the risk and subsequent cost of the agreement.

This doesn’t necessarily mean that the agreement drafted to protect the assets of a wealthy individual is any more complex than that of someone of more modest means.  Of course, that may be the case to a degree, but it is usually just the assets and liabilities statement that has a few more lines to it.

So what do you do?

Throw your hands in the air and do nothing? Run the gauntlet? Or is there another solution? Maybe put everything into a family trust? Unfortunately, when it comes to family law matters, assets you control but don’t actually own (such as those held in trust) all go into the pot if you do have to divide your financial resources.

Because family disputes and court action cost individuals and the community millions of dollars each year, successive governments via the Family Law Act have provided financial agreements as a vehicle to keep people out of the court system. They are the only option you have if you want to quarantine assets from future claim.

People are often motivated to preserve and protect assets for the benefit of children from a previous relationship.  Used in conjunction with a sound estate planning strategy, a financial agreement may be the only option you have to minimise the chances of a challenge to your will by a spouse under family provision legislation.

Of course, there are many other reasons why people might consider using a financial agreement.

The Family Court has demonstrated a willingness to see financial agreements upheld, where it can be demonstrated that the parties have been completely honest with each other and the lawyers have provided proper legal advice.  As long as the agreement includes stringent compliance with legislative requirements, then any risks of a successful challenge are minimised.

With over a thousand agreements finalised through our Document Review Service, we are yet to see a successful challenge (touch wood).

When you consider that the chance of a first marriage failing is somewhere between 35 and 40 percent and second marriages tend to be higher still, we believe the risks of not having an agreement in place far outweigh the risks of a successful challenge.

What do you think?

By Ian Macleod

Related article: How to make sure your Financial Agreement stands up.

About the author

Ian is a legal publisher and owner of RP Emery and Associates. We were the first organisation in Australia to offer binding financial agreement templates and a supplementary legal service going back to March 2009.