In Australia, binding financial agreements (BFAs) are often sought to protect assets in the event of relationship breakdowns. One question that frequently arises is whether these agreements can extend to safeguarding future income. This is particularly relevant for individuals anticipating significant income growth, inheritance, or business expansion after entering a relationship or marriage.
How Binding Financial Agreements Can Protect Future Income
Binding financial agreements can indeed protect future income, but this protection comes with specific conditions and limitations under Australian family law. The Family Law Act 1975 provides the framework for these agreements, allowing couples to determine how their financial assets will be divided if their relationship ends.
When it comes to future income, a BFA can contain provisions that specifically address income that has not yet been earned or received. This might include projected salary increases, anticipated business profits, royalties from creative works, or proceeds from investments that are expected to mature in the future.
For example, a business owner expecting substantial growth in their company’s value can include clauses that ring-fence this future increase as separate property. Similarly, professionals anticipating career advancement with significant salary increases can specify how this additional income should be treated in the event of separation.
Types of Future Income That Can Be Protected
Various forms of future income can be addressed in a binding financial agreement. Understanding what can be included helps in creating a comprehensive agreement that truly protects your financial interests.
Future salary increases or bonuses can be specified as separate property, particularly if they’re linked to efforts or qualifications obtained before the relationship began. For instance, if you’re undertaking professional development that will lead to a qualification and salary increase, this future benefit can be protected.
Business income presents another important category. If you own a business at the time of entering the relationship, a BFA can stipulate that future growth in that business remains your separate property. This is particularly valuable for entrepreneurs or business owners who anticipate significant expansion of their ventures.
Inheritance prospects represent a common concern for many Australians. While you cannot create a binding agreement about an inheritance you haven’t yet received (as it’s not your property to contract about), you can include provisions about how any future inheritances will be treated if they materialise during the relationship.
Legal Requirements for Future Income Protection
For a binding financial agreement to effectively protect future income, certain legal requirements must be met. These requirements ensure the agreement stands up to scrutiny if challenged in court.
Specificity is crucial when drafting clauses about future income. Vague or overly broad provisions may be deemed unenforceable. The agreement should clearly identify the types of future income being protected and provide a reasonable method for calculating or identifying this income separate from assets or income acquired during the relationship.
Full financial disclosure remains a cornerstone of valid BFAs. Both parties must disclose not just current assets and liabilities, but also reasonable expectations of future financial benefits. Failing to disclose anticipated income streams could render relevant provisions or even the entire agreement invalid.
Additionally, the agreement must be fair and reasonable when created. Courts may set aside agreements that would leave one party in a position of serious financial disadvantage, particularly if circumstances have changed substantially since the agreement was made.
Limitations of BFAs for Future Income Protection
While binding financial agreements offer significant protection for future income, they do have important limitations that must be understood. Recognising these constraints helps create realistic expectations about what these agreements can achieve.
Courts maintain the power to set aside binding financial agreements under certain circumstances. This is particularly relevant for provisions dealing with future income, as these inherently involve speculation about future events. If the court finds that circumstances have changed so dramatically that enforcing the agreement would be unjust, it may set aside all or part of the agreement.
For example, if one party develops a serious illness that prevents them from earning income as anticipated when the agreement was made, a court might find it unjust to enforce provisions that assumed both parties would maintain earning capacity.
The Challenge of Speculative Future Income
Highly speculative future income presents particular challenges for binding financial agreements. There’s a fundamental tension between being specific enough for enforcement and accounting for uncertainties in future earnings.
Courts may scrutinise provisions related to highly uncertain future income more carefully. For instance, clauses protecting potential income from entrepreneurial ventures with no established track record might be viewed as too speculative to enforce rigidly.
To address this challenge, agreements often include mechanisms for reassessment or calculation based on actual outcomes rather than attempting to predetermine exact amounts. These might include formulas or principles to be applied once the speculative income becomes actual.
Changes in Australian Law
Australian family law continues to evolve, and changes in legislation or case law can affect how courts interpret binding financial agreements. This creates an ongoing risk for long-term agreements, particularly those with provisions about future income.
Recent court decisions have emphasised the importance of independent legal advice and procedural fairness in creating enforceable agreements. The High Court’s decision in Thorne v Kennedy (2017) highlighted that even technically compliant agreements can be set aside if there are elements of undue influence or unconscionable conduct.
This underscores the importance of regular reviews of binding financial agreements, especially those with provisions about future income. What seems reasonable and enforceable today might not be viewed the same way years later under evolved legal standards.
Practical Strategies for Protecting Future Income
To maximise the effectiveness of a binding financial agreement in protecting future income, several practical strategies can be employed. These approaches help address the inherent challenges in dealing with income that has not yet materialised.
Creating clear formulas or mechanisms for determining what constitutes protected future income provides clarity and reduces the risk of disputes. Rather than simply stating that “future business income is protected,” an agreement might specify that “75% of the increase in value of Business X from its valuation of $Y on [date] will remain the separate property of Party A.”
Including review mechanisms and sunset clauses can also strengthen an agreement’s enforceability. For example, the agreement might stipulate that provisions regarding future income will be reviewed every five years or upon significant life events such as the birth of children or substantial changes in career.
Different Approaches Based on Income Types
Different types of future income may require different protective strategies within a binding financial agreement. Tailoring the approach to the specific nature of the anticipated income improves both protection and enforceability.
For salary increases and bonuses, agreements might distinguish between increases that reflect general market adjustments versus those resulting from qualifications or experience gained before the relationship. The former might be considered relationship property while the latter remains protected.
Business income often benefits from more detailed provisions. These might include regular business valuations to establish baseline figures and growth, or mechanisms to distinguish between income derived from personal efforts during the relationship versus passive appreciation of pre-existing business assets.
For creative works or intellectual property, agreements can specify different treatment for works created before the relationship versus those created during it. They might also distinguish between ongoing royalties from pre-relationship works and new income from works created during the relationship.
Documentation and Evidence
Maintaining appropriate documentation strengthens the enforceability of provisions protecting future income. This creates a clear record that can be referenced if the agreement is ever challenged.
Regular financial statements, business valuations, and career advancement documentation should be maintained throughout the relationship. These establish baselines and track growth, making it easier to identify what portion of income derives from pre-relationship assets or efforts.
Additionally, keeping records of discussions and negotiations about future income provisions helps demonstrate that both parties understood and freely consented to these terms. This documentation can be valuable if questions about informed consent arise later.
When BFAs May Not Be Suitable for Future Income Protection
Despite their utility, binding financial agreements are not always the most appropriate tool for protecting future income. In some circumstances, alternative approaches might better serve your interests.
For extremely speculative future income with no current foundation, a BFA may struggle to provide meaningful protection. Courts are unlikely to enforce provisions that attempt to ring-fence entirely hypothetical future wealth with no current basis.
In these cases, it might be more effective to create an agreement after the income begins to materialise, or to use other financial structures like trusts or corporate entities to manage newly acquired wealth.
When Regular Updates Are Essential
Some situations demand regular updates to binding financial agreements to maintain protection of future income. Recognising these circumstances helps ensure continued effectiveness of the agreement.
Significant career changes often necessitate updates to agreements. If your career takes an unexpected turn that dramatically alters your income prospects—either positively or negatively—the original provisions might no longer reflect your circumstances accurately.
Similarly, business developments like expansions, mergers, or acquisitions can fundamentally change the nature of business income in ways not contemplated by the original agreement. In these cases, updating the BFA ensures it remains relevant to your current situation.
Family changes such as having children or taking on care responsibilities for elderly parents frequently impact income trajectories. These life events might necessitate revisions to ensure the agreement remains fair and enforceable.
Getting Professional Help with BFAs for Future Income
Given the complexities of protecting future income through binding financial agreements, professional guidance is essential. The right legal support ensures your agreement is both effective and legally robust.
Working with lawyers experienced in family law and binding financial agreements provides several advantages. Specialised lawyers understand the nuances of drafting enforceable provisions for future income protection and can anticipate potential challenges or weaknesses in proposed terms.
Additionally, financial advisors can play a valuable role in developing realistic projections and valuation methods for future income streams. Their expertise helps create agreements based on sound financial principles rather than overly optimistic or pessimistic assumptions.
The Cost-Benefit Analysis
When considering a binding financial agreement to protect future income, it’s important to weigh the costs against the potential benefits. This analysis helps determine whether pursuing such an agreement represents good value.
The complexity of provisions dealing with future income often increases the cost of creating a binding financial agreement. More detailed provisions require more legal drafting time and potentially more negotiation between parties.
However, these costs should be compared to the value of the income being protected. For individuals with substantial income growth potential or valuable business interests, the investment in a comprehensive agreement often represents excellent value relative to the potential financial impact of relationship breakdown without such protection.
Regular reviews and updates add to the lifetime cost of maintaining effective protection, but also ensure the agreement remains relevant and enforceable as circumstances change.
Need Help With Binding Financial Agreements?
Protecting future income through binding financial agreements requires careful planning and expert legal guidance. As a law firm in Australia specialising in binding financial agreements, we can help you navigate this complex area of family law. Our team at my law firm understands the nuances of creating agreements that provide meaningful protection for future income while meeting all legal requirements for enforceability.
Contact our team today by calling 1300 529 888 to discuss how we can help safeguard your financial future with a properly structured binding financial agreement.