For couples entering into a binding financial agreement (BFA), protecting assets in the event of separation is a top priority. But what about assets that don’t yet exist—like future inheritances or unexpected windfalls? This article explores whether and how BFAs can address these potential future assets in Australia.
Can Binding Financial Agreements Include Future Inheritances?
Yes, binding financial agreements can indeed cover future inheritances and windfalls in Australia. While these assets don’t exist at the time of creating the agreement, properly drafted BFAs can include provisions that specify how such future assets would be treated if the relationship breaks down.
The Family Law Act 1975 allows couples to make legally binding arrangements about the division of property, including assets that may be acquired in the future. This means that a well-drafted BFA can protect inheritances and other windfalls received during the relationship from being included in the property pool available for division if the relationship ends.
The key lies in the specific wording of the agreement. For a BFA to effectively cover future inheritances, it must contain clear provisions that explicitly address how these assets will be treated. Without such specific clauses, future windfalls might fall into the general property pool that could be divided between parties upon separation.
How BFAs Address Future Inheritances
There are several approaches to addressing future inheritances in a binding financial agreement. One common method is to include a clause that specifies that any inheritance or windfall received by either party during the relationship remains the separate property of the recipient. This approach essentially “quarantines” the inheritance from the shared property pool.
Another approach is to create a sliding scale based on the length of the relationship. For example, the agreement might state that if separation occurs within five years, the inheritance remains 100% with the recipient, but after that period, a small percentage becomes available for division, with the percentage increasing over time.
Some agreements might also distinguish between the capital value of the inheritance and any income or growth derived from it. For instance, the principal amount might remain separate property, while any interest or investment returns could be considered joint property.
Legal Requirements for Validity
For provisions about future inheritances to be enforceable, the BFA must meet all the standard legal requirements under the Family Law Act. This includes both parties receiving independent legal advice before signing, full and frank disclosure of current financial circumstances, and the agreement being free from duress, undue influence, or unconscionable conduct.
The agreement must be specific enough to be enforceable but also flexible enough to accommodate various possible scenarios. This balance can be challenging to achieve without professional legal guidance, as overly vague provisions may be unenforceable, while overly rigid ones might not account for changing circumstances.
Limitations of BFAs Regarding Future Assets
While binding financial agreements can address future inheritances, there are important limitations to understand. No agreement can cover all possible future scenarios with absolute certainty, and courts retain some discretion to set aside agreements in certain circumstances.
One significant limitation is that a BFA cannot bind third parties, such as the person leaving the inheritance. If a will specifically contradicts provisions in your BFA, this can create legal complications. Additionally, if circumstances change substantially from what was contemplated when the agreement was made, courts may consider setting aside the agreement.
Another consideration is that the value and timing of inheritances are often unpredictable. A potential inheritance might never materialise, or it might be much larger or smaller than anticipated. This uncertainty can make it difficult to create precise provisions in a BFA.
Potential Issues with Enforcement
Courts have shown that they will uphold properly drafted BFAs, including provisions about future inheritances. However, they may scrutinise these agreements closely if challenged, particularly if the agreement appears unfair in light of subsequent events that could not have been foreseen when the agreement was made.
In the case of Thorne v Kennedy [2017], the High Court of Australia set aside a BFA due to unconscionable conduct and undue influence, highlighting the importance of ensuring that agreements are negotiated fairly and with full disclosure. While this case didn’t specifically address future inheritances, it demonstrates the court’s power to intervene when agreements are deemed unfair.
Courts may also consider whether the agreement makes adequate provision for significant changes in circumstances, such as the birth of children or one party developing a serious illness or disability. If the agreement fails to account for such changes, it may be more vulnerable to being set aside.
Practical Considerations for Drafting BFAs for Future Assets
Specificity vs. Flexibility
When drafting a BFA to cover future inheritances, striking the right balance between specificity and flexibility is crucial. The agreement should clearly define what constitutes an inheritance or windfall and how it will be treated, but it should also allow for some adaptability as circumstances change over time.
It’s advisable to include provisions that address not just the inheritance itself, but also any assets purchased with inheritance funds or any growth in value of those assets. For example, if inheritance money is used to purchase a family home, the agreement should specify how that property would be divided upon separation.
Consider including review mechanisms that allow the agreement to be revisited after certain triggering events, such as the birth of children, significant changes in financial circumstances, or after a specified period has elapsed.
Full Disclosure Requirements
While future inheritances are by nature uncertain, parties should disclose any reasonably anticipated inheritances during the BFA negotiation process. This might include discussing family wealth, expectations from parents’ estates, or known trusts that may provide future benefits.
Failure to disclose potential future assets that could reasonably be anticipated might later be grounds for challenging the agreement. The courts expect parties to be transparent about their financial circumstances and prospects, even when these involve some uncertainty.
Documentation of any discussions about potential inheritances during the negotiation process can help demonstrate that both parties were aware of these possibilities when entering the agreement, strengthening its enforceability.
Strategies for Protecting Future Inheritances
Clear Definitions and Classifications
One effective strategy for protecting future inheritances in a BFA is to clearly define and classify different types of property. The agreement might distinguish between “relationship property” (acquired during the relationship through joint efforts) and “separate property” (including inheritances, gifts, and assets owned before the relationship).
The agreement can then specify that separate property, including future inheritances, remains with the original owner in the event of separation. It might also address whether any growth or income derived from separate property should be classified as separate or joint property.
Some agreements include provisions that “trace” the origin of assets, so that property purchased with inheritance funds retains its character as separate property. This can be particularly important if inheritance money is used to purchase joint assets or pay down joint debts.
Periodic Reviews and Updates
As life circumstances change, it’s wise to review and potentially update your BFA. This is particularly important after receiving a significant inheritance or windfall that wasn’t specifically anticipated in the original agreement.
Consider scheduling regular reviews of your BFA every few years or after significant life events such as the birth of children, career changes, or receiving an inheritance. This helps ensure the agreement remains relevant and reflects your current wishes and circumstances.
Any updates to the agreement must follow the same formal requirements as the original BFA, including independent legal advice for both parties. Simply amending the agreement informally won’t create legally binding changes.
Alternatives and Complementary Measures
Testamentary Trusts
In addition to a BFA, those expecting to receive inheritances might discuss with family members the possibility of establishing testamentary trusts in their wills. These trusts can provide an additional layer of protection for inherited assets by keeping them separate from the beneficiary’s personal assets.
A testamentary trust comes into effect upon the death of the person making the will and can include provisions that protect the inheritance from relationship breakdowns. This approach works well alongside a BFA that addresses how such trust interests would be treated upon separation.
The person leaving the inheritance might also consider including specific provisions in their will regarding their intentions for the inheritance, which can sometimes influence how courts view these assets in family law proceedings.
Discretionary Family Trusts
For those who already have significant assets or expect to receive them, establishing a discretionary family trust might provide additional protection beyond what a BFA can offer. These structures can hold assets separately from personal ownership, potentially providing both asset protection and tax benefits.
A BFA can then address how trust interests would be treated in the event of separation. However, it’s important to note that family courts can sometimes look through trust structures in certain circumstances, so this strategy should be implemented with professional legal and financial advice.
The interplay between trusts and family law is complex, and courts have shown willingness to include trust assets in the property pool in some cases, particularly where one party has effective control over the trust.
Need Help Protecting Your Future Assets?
Planning for the protection of future inheritances and windfalls requires careful consideration and properly drafted legal agreements. As a law firm in Australia, my law firm can help you create a binding financial agreement that addresses your specific concerns about future assets. Contact our team of binding financial agreement lawyers today by calling 1300 529 888.