What is a Marital Financial Agreement?
A marital financial agreement, also known as a "MFA", is a legally enforceable contract between two married parties, or two parties who are in a de-facto relationship which is signed either before or during the course of the relationship. It can set out the respective interests of both parties in the assets, finances and superannuation which are owned both jointly and separately. MFAs are designed to provide some certainty to the financial future of one or both parties to a relationship during their relationship and/or in the event of separation or marriage breakdown. An MFA can be used as a precursor to divorce if the parties wish to have their circumstances assessed and identified before taking the next step to end their official legal marriage relationship.
MFAs have now come to be more commonly called "Binding Financial Agreements" ("BFAs") amidst the rise of their notoriety, although the terms are interchangeable. We refer to them as MFAs in this article in line with the terminology currently found in Australian family law. Even though some people may still refer to them as BFAs, the Family Court of Australia will only use the term "marital financial agreement". We, therefore recommend that you refer to these agreements as MFAs to ensure you are using the correct terminology. Without going in to technical detail, while the legislative provisions for these documents are the same, the case law and the more common scenarios for these agreements differ for married parties and de facto parties. We will look at the differences in more details below, when discussing who is eligible to enter into an MFA.
While the legislation sets out some of the requirements for MFAs, in addition to this, each party will be advised to each seek their own independent legal advice on any agreements they wish to enter into prior to signing. Each party will need to provide evidence of their financial circumstances and assets and liabilities to their lawyer and enter into the contract voluntarily, without any duress, coercion or undue influence. Both parties will need to give full and frank disclosure of their assets , liabilities and financial resources to the other before the contract is made to ensure it is valid so that the court can enforce the agreement if necessary.
An MFA can be tailored to suit the circumstances, assets and goals of the parties entering in to the agreement. The contract can provide for a range of scenarios such as, what is to happen to assets existing at the time of signing (or at another nominated date), existing joint and separate debt, future income, inheritance and any provision for children they may have together in the future. It can also make provisions for spousal maintenance claims even though this is not usually a prominent factor in many couples circumstances – therefore, leaving all options open.
Therefore, the main purpose of an MFA is to;
- (1) To provide for a period of time where you and your partner financially support each other;
- (2) To save you both having to go through the courts to have your financial circumstances and property provided for; (3) To save both parties money in the long run by not having to put a claim in to the court later on, possibly for years to come; and
- (4) To avoid a lengthy and more costly process which can inflict emotional distress on both parties involved.
In Australian domestic law, in relation to domestic relationships, there are 2 types of legal entities that can enter into an MA – Married Parties and De Facto Parties. The relevant legislation is different for each of these groups, and one of the biggest differences is that spouses must have some regard to the income of both parties when entering into the agreement, however, this is not the case for de facto couples. In addition, you must be or have been legally married to enter into an MFAs, however, you do not need to be in a legalised de facto relationship, however, you can be.
More specifically, Consideration should be given where the parties are:
- (1) Happily married;
- (2) In an unhappy relationship, but may reconcile;
- (3) Separating and need to agree on how to achieve the best outcome;
- (4) Divorcing; or
- (5) divorced.
Types of Marital Financial Agreements
Marital Financial Agreements, commonly referred to as prenups, post-nups or separation agreements, are designed to deal with all the property rights of the parties, including the rights of the parties in the event of their separation and/or divorce. These laws are governed by the Family Law Act R.S.O. 1990, Chapter F.3 (the "Act").
There are three (3) types of agreements:
Prenuptial agreements – are entered into before the marriage.
Postnuptial agreements – are entered into after the marriage and during the marriage but before the marriage ends.
Separation agreements – are entered into after the marriage has ended by separation or divorce.
A prenuptial agreement is entered into before the marriage. It provides both parties with the security, certainty and finality, before commencing the marriage, that they have considered the possible consequences of a divorce or separation. It is typically entered into by parties with significant assets before the marriage who want to protect these assets upon a separation or divorce.
A postnuptial agreement may be entered into and the contents of the agreement may be negotiated between the spouses during the course of cohabitation but before a breakdown of the relationship. This type of agreement would be used in the event that a party’s future entitlement to support at the end of their relationship has been negotiated or if there are limited or joint assets and the parties would like to deal with the division of those assets.
A separation agreement is a contract between spouses who have separated or who are in the process of separating or divorcing. It deals with their rights and obligations including child custody and access, equalization of property, support orders and debts and recognizes the rights of the parties to retain or transfer their property and discharge or transfer their debts and provide for the support of their children.
Advantages of Having a Marital Financial Agreement
Marital financial agreements are nothing new but they are becoming more common in the community. Indeed, in my view the idea of a "marital financial agreement" will eventually be incorporated into the "Conventional Terms of Settlement" meanings for divorce and separation matters.
Before explaining their benefit, I often find people are surprised to hear that marital financial agreements are enforceable and valid (as opposed to being a mere prenuptial agreement) or even actually available to parties who aren’t married = de facto relationships or same sex relationships. Unfortunately, due to miscommunication on the matter, too many people are either unaware of or too embarrassed to communicate they don’t know what a marital financial agreement is or why it is needed.
In summary, marital financial agreements provide parties to a prospective marriage or existing relationship with "certainty". That is, certainty in the relationship and certainty that where there is a breakdown in the relationship that there are "rules" that either the parties have decided upon before commencing the relationship, or as modified during the course of the relationship to reflect its evolution.
Despite the provisions of the Family Law Act (1975) and the potential for one party to seek court orders for the alteration of property interests and spousal maintenance despite the provisions of the marital financial agreement (see the articles "How enforceable are financial agreements in Australia" and "When property division decisions can be set aside") – the marital financial agreement is known as a long term "insurance policy" for parties that can be relied upon in the event of a relationship breakdown.
The benefit of a financial agreement is that it will protect assets that would ordinarily be subject to family law property adjustment claims by the other party. It also helps to provide certainty of expectations in a relationship including expectations of financial duties and contribution obligations, albeit that spousal duty obligations cannot be renounced by agreement.
Common Provisions in Marital Agreements
While each Marital Agreement will be unique to the parties entering into it, there are a host of common clauses that may be found included in a well-drafted Marital Agreement.
A. Asset Division
The most common clause to be found in a Marital Agreement is with respect to the division of assets. The parties will typically draft the broad stipulations as to how assets will be divided in the event of divorce leaving specific items of property to be addressed in a schedule or by reference to an exhibit. Assets can include the family home, vehicles, jewelry, pensions, 401(k)s, bank accounts, etc.
B. Debt Management
Similar to the division of assets, it is common for parties to address the issue of debt in their Marital Agreement. The parties will set forth which debts are to be paid from the marital estate and the method of payment. If debts are to be paid from specific assets that are awarded to a party, the procedure for payment may also be addressed.
C. Spousal Support
As mentioned above, Marital Agreements are a great tool for addressing the issue of spousal support/alimony. Parties can arrive at any agreement they desire with respect to support so long as it is not against public policy and otherwise enforceable. As such, the parties may agree to waive support or to the amount and duration of support if agreed that support will be paid from one party to another. The parties may include a range in which the amount of support may be payable as well. One example is that support will be payable at a rate of $X.00 per week during the transitional period of 12 months, $X.00 per week for the next 6 months, and $X.00 per week for the next 15 months. Parties may also agree to an early termination clause for support. This may occur if the other party cohabitates long term in a relationship akin to marriage, remarrys, or earns a certain amount in income.
D. Children
While the parties may not make provisions in their Marital Agreement with regard to minor children if the divorce is pending when the Agreement is drafted, this is usually not the time to address child support. Child support is generally agreed to between parents at the time of a divorce so that there is a clear understanding of the rights of the child. Furthermore, should the agreement not address support in a pending divorce, the court can still provide for the appropriate amount of support due to the child after the divorce is final.
If the parties are entering into a Marital Agreement prior to marriage, they should include a section addressing support for the anticipated children to the marriage. In these circumstances, parties may agree to statutory child support or some other amount. They may also provide for the method of adjustment of child support upon the birth of another child. In such an instance, the parties should consult with an attorney for guidance. Furthermore, child support cannot be waived in a Marital Agreement. Rather, the amount has to be appropriate for the intended recipient.
How To Create A Marital Financial Agreement
Each partner must seek the advice of a separate, independently instructed solicitor. Each solicitor will make sure the agreement is properly explained to their client, whether this is face to face and/or in writing. They will be vigilant that the agreement will be drawn up, and signed, at a time when all of the parties have the necessary capacity, are acting voluntarily and do not intend to divorce imminently. They will advise that each of the parties should declare to each other and to their solicitors all of their assets and liabilities, "full and frank" as we lawyers like to say, so that there is a fair exchange of all of the information. Full disclosure is important in ensuring that any agreement is considered to be fair.
The next step is for the solicitors to draft a written agreement, trying to accommodate as many of each party’s needs as possible. If any changes are suggested during the drafting process, the solicitors will advise their clients as to the effect of the changes on the overall fairness of the agreement .
When both parties’ solicitors are satisfied that the agreement is fair, and their clients agree, the agreement is then signed.
All of this can happen very quickly, some high net-worth individuals we have worked with have been prepared to sign these documents after just a week’s reflection. That raises "fairness" issues for the inexperienced solicitor but ultimately in the context of the new law and the deferential approach judges are now applying, as a family lawyer you have to trust your client to decide how and when to respond.
And this cannot be said often enough, if you are explaining that your client is going to sign a document that entirely disadvantages them, like here where the wife is giving up her right to maintenance (there is no mention of a review clause), you must encourage them to take a long hard think about it and not help them by making it too easy.
Legal Aspects and Enforceability
Parties to a financial agreement must consider various legal principles which come to bear on the agreement’s enforceability. Whether or not an agreement, or a portion of it, is properly enforceable is an issue integral to the size of the settlement that may be ordered by a family court in circumstances where one of the parties seeks orders varying its terms.
Some of the relevant principles applicable to the enforceability of a financial agreement include that:
• The agreement is not enforceable where a provision relating to the credit status of a spouse is found by a court to be unjust or inequitable (s.90G(1)(b))
• A financial agreement is unenforceable (both in relation to property settlement arrangements and spousal maintenance) where the agreement was entered into under a material or fraudulent misrepresentation by one of the parties, for example the non-disclosure of the existence of assets (s.90G(1)(a), s.90SB(b))
• An agreement is unenforceable where it is wholly or partly void or voidable for common law or statutory reasons (for example, where the contract is contrary to law or public policy or where part of the agreement is unascertainable) (s.90G(1)(c) and s.90SB(c))
• An agreement may be unenforceable if one party can establish that the terms of the agreement are manifestly unreasonable, or where the agreement is so unfair or unreasonable that it could not have been the true agreement of the parties (in circumstances where a court would otherwise replace the agreement with an alternative order) (s.90H)
• In circumstances where parties separate but then reconcile, it is possible that an earlier agreement may no longer reflect the parties’ intentions as to their future matrimonial property arrangements (s.90J)
• An agreement, or a term of it, may be set aside where there has been a ‘serious if not substantive’ change in circumstances since it was entered into (s.90K)
• Where an agreement impairs the rights of a third party, the agreement will be unenforceable to the extent necessary to protect the rights of the third party (s.90K)
• If the court thinks that a person has failed to comply with their obligations under a financial agreement (with respect to property settlement or spousal maintenance) it may make orders intended to ensure compliance (s.90J).
Pitfalls to Avoid
One of the most common mistakes clients make when entering into a marital financial agreement is to not disclose their assets fully. It is a common misconception to think that non-disclosure when entering such an agreement will not have any consequences. Section 90G of the Family Law Act 1975 (Cth) sets out that a Court can set aside a financial agreement if there has been no full and frank disclosure.
Another mistake often made when entering into a financial agreement is not obtaining independent legal advice. Section 90G(1)(g) of the Act sets out that the financial agreement is not binding on the parties (and will be set aside by the Court) if the signed document does not state that before signing the agreement each party was provided with independent legal advice (or has waived this right in relation to the making of the Agreement).
Another issue which can arise when preparing a financial agreement is if the non-disclosure of one of the parties post entry into the agreement is found by the Court to significantly effect the asset pool (such as the sudden acquisition of a substantial inheritance). If the court views that the Agreement is no longer fair or equitable the Court may set aside the agreement.
In order to avoid these common pitfalls it is advisable to ensure the following from the outset: The bottom line is that parties should ensure that they comply with the law to ensure that their financial agreement remains binding.
When to Revise Your Marital Financial Agreement
Marital financial agreements are a reflection of the parties’ lives at the time of execution. Therefore, if the circumstances of those lives change over time, you may find that the agreement no longer reflects your and your partner’s intentions.
It is important that the existence of such an agreement does not bind you and your partner to terms that are no longer appropriate. It may be that you both still wish for the agreement to govern the outcome of your relationship, but just wish it to be more reflective of the current situation . Alternatively, it may be that you now want to make provisions in the event of separation that were abbreviated or absent from the initial agreement.
In either case, a new marital financial agreement will be required. Most important, when undertaking this exercise, is ensuring that you pay for independent legal advice and then allow the solicitor to explain all of the provisions to you separately before signing.
Common scenarios that give rise to the need for amendments to a previous marital financial agreement include:
These are not exhaustive scenarios, but I hope that it demonstrates that marital financial agreements can be amended (and terminated) as your lives evolve.