Binding financial agreements are valuable tools for couples looking to protect their assets and establish clear financial arrangements. However, these agreements have limitations, and certain assets or matters cannot be effectively addressed within a BFA. Understanding what falls outside the scope of a BFA is essential for anyone considering this type of legal arrangement in Australia. This article explains the specific assets and matters that a BFA cannot cover, helping you make informed decisions about protecting your financial interests.
Assets and Matters That Cannot Be Included in a BFA
Superannuation Interests
Superannuation presents unique challenges within binding financial agreements. While parties can express their intentions about superannuation splitting in a BFA, the agreement alone does not actually split the superannuation. To divide superannuation interests, parties must follow the specific procedures set out in the Family Law Act 1975 and the superannuation fund’s governing rules. This typically involves obtaining a flagging agreement to prevent the fund from paying out certain amounts, followed by a splitting agreement or court order. The superannuation fund trustee must approve and implement any splitting arrangement, which operates independently from the BFA itself.
The complexity arises because superannuation is held in trust by the fund, meaning the parties do not have direct ownership of these funds until they meet conditions of release. A BFA can state that one party will receive a certain percentage of the other’s superannuation, but this intention must be actioned through the proper superannuation splitting process. Without taking these additional steps, the superannuation division outlined in a BFA may be unenforceable, leaving parties without the protection they believed they had secured.
Third-Party Assets and Debts
A BFA can only deal with assets and liabilities that belong to the parties entering the agreement. Assets held by third parties, such as family trusts, companies, or other individuals, cannot be directly divided or allocated through a BFA. For example, if one party’s parents hold property that the couple has been living in, the BFA cannot determine what happens to that property because it does not belong to either party to the agreement. Similarly, assets held within a discretionary family trust are technically owned by the trust itself, not the individual who may be a beneficiary or appointor of that trust.
This limitation creates significant complexity for individuals with complex asset structures. If one party controls a family trust that holds substantial assets, the other party may find it difficult to secure an interest in those assets through a BFA alone. While the BFA might address the value of any distributions received from the trust or the party’s interest in controlling the trust, it cannot compel the trust to distribute assets in a particular way. Parties with trust structures, company holdings, or assets intermingled with family members’ property should seek detailed legal advice about how to structure their financial protection arrangements.
Debts owed to third parties present similar challenges. While a BFA can allocate responsibility for paying certain debts between the parties, this allocation does not bind the creditor. If one party agrees to take responsibility for a joint debt but fails to pay, the creditor can still pursue the other party for payment. The innocent party’s remedy would be to seek enforcement of the BFA against the defaulting party, rather than being able to avoid the creditor’s claim entirely.
Children’s Matters and Child Support
Binding financial agreements cannot include provisions relating to children, including parenting arrangements and child support. The Family Law Act 1975 explicitly prohibits parties from contracting out of child support obligations through a BFA. Any clause attempting to limit or exclude a party’s child support liability would be void and unenforceable. This protection exists because child support is considered a right of the child, not something that parents can bargain away between themselves.
Child support in Australia is primarily calculated through the Department of Human Services using a formula based on both parents’ incomes, the care arrangements for the children, and other relevant factors. While parents can make private arrangements for child support, these cannot be locked in through a BFA in a way that prevents either party from later applying for an administrative assessment. Even if both parties agree at the time of signing that no child support will be payable, this agreement would not prevent either party from seeking child support in the future.
Parenting arrangements, including where children will live and how they will spend time with each parent, similarly cannot be determined by a BFA. These matters must be dealt with separately, either through informal agreements between the parents, parenting plans, or court orders. The court always retains jurisdiction over children’s matters and will make decisions based on the best interests of the child, regardless of any prior agreement between the parents.
Spousal Maintenance That Defeats Creditors
While spousal maintenance can generally be addressed in a BFA, there are limitations when the arrangement would have the effect of defeating creditors. If a BFA includes spousal maintenance provisions designed to shield assets from legitimate creditors, those provisions may be set aside. The Family Law Act allows courts to set aside agreements that are designed to defraud creditors or defeat existing creditor claims. This means parties cannot use a BFA as a vehicle to move assets beyond the reach of people to whom they owe money.
Courts will scrutinise maintenance arrangements that appear disproportionate to the parties’ actual circumstances or that coincide with financial difficulties involving third-party creditors. A maintenance arrangement that significantly reduces one party’s asset base while that party has outstanding debts may raise red flags. The timing of the agreement and the surrounding circumstances will be carefully examined if creditors challenge the arrangement.
Future Assets Not Yet in Existence
BFAs can deal with existing assets and, to some extent, assets that are anticipated to be acquired in the future. However, there are practical limitations when dealing with assets that do not yet exist and whose value or nature is unknown. While a BFA can include clauses about how future assets will be treated, the enforceability of these provisions may be challenged if circumstances change substantially from what was anticipated at the time of signing. Courts have shown willingness to set aside agreements where the future turned out very differently from what was contemplated.
For example, if a BFA states that any inheritance received by a party will remain their separate property, this may be enforceable. However, if the agreement attempts to allocate specific percentages of unknown future business interests or investment gains, the lack of specificity may create enforcement difficulties. The more speculative and uncertain the future asset, the more vulnerable the relevant BFA provisions may be to challenge. Parties should be as specific as possible about the assets they are addressing and consider including mechanisms for updating the agreement as circumstances change.
Property Subject to Legal Restrictions
Some types of property carry legal restrictions that prevent them from being freely dealt with in a BFA. Native title interests, for example, are subject to specific legislation and cannot be transferred or allocated through a private agreement between parties. Similarly, some forms of intellectual property may have assignment restrictions or require registration procedures that a BFA alone cannot accomplish. Real property that is subject to caveats, mortgages, or other registered interests may also present complications, as the BFA cannot override the rights of parties who have registered interests on the title.
Certain government entitlements and benefits also fall outside the scope of what a BFA can address. Centrelink payments, disability pensions, and other social security benefits are personal entitlements that cannot be transferred or allocated to another person through a financial agreement. While the receipt of such payments might affect the overall financial picture considered in a BFA, the entitlements themselves are not assets that can be divided.
Important Considerations for BFA Limitations
The Role of Independent Legal Advice
One of the critical requirements for a valid BFA is that each party must receive independent legal advice before signing. This advice must include an explanation of the effect of the agreement on the rights of the party and the advantages and disadvantages of entering the agreement. Given the limitations discussed above, the legal advice should clearly explain which assets and matters can and cannot be effectively addressed by the BFA. A party who signs without understanding these limitations may later seek to have the agreement set aside on the basis of inadequate legal advice.
The independent legal advice requirement also means that both parties must use different lawyers. This ensures that each party receives advice that is genuinely in their own interests, rather than advice that might be skewed towards reaching an agreement. The lawyers must sign statements confirming they have provided the required advice, and these statements are annexed to the BFA. If the advice given was inadequate or failed to explain the limitations of the agreement, this can be grounds for challenging the BFA’s validity.
Circumstances That May Void a BFA
Even for assets that can be included in a BFA, the agreement may not provide the protection parties expect if certain circumstances arise. A BFA can be set aside if it was obtained by fraud, including non-disclosure of relevant information. If one party failed to disclose significant assets or debts at the time the agreement was made, the other party may be able to have the agreement set aside. Full and frank disclosure of financial circumstances is essential to creating an enforceable BFA.
A BFA may also be set aside if circumstances have changed materially since the agreement was made, making it impracticable for the agreement to be carried out. This might occur if the value of assets has changed dramatically, if parties have had children (when the agreement did not contemplate children), or if one party has experienced serious illness or disability. The court has discretion to set aside agreements that would cause serious injustice if enforced in changed circumstances.
Unconscionable conduct at the time of making the agreement can also lead to it being set aside. This might include one party taking advantage of the other’s emotional vulnerability, lack of understanding, or unequal bargaining position. Agreements signed under duress or undue influence are similarly vulnerable to being overturned. The circumstances surrounding the negotiation and execution of the BFA are always relevant to its enforceability.
Alternatives and Complementary Arrangements
Given the limitations of BFAs, parties may need to use complementary legal arrangements to achieve their financial protection goals. For superannuation, this means following the formal splitting procedures in addition to addressing intentions in the BFA. For assets held in trusts or companies, parties might consider restructuring the ownership of those entities or entering into separate agreements that bind the relevant corporate entities. For children’s matters, parenting plans or consent orders can be prepared alongside the BFA to address the full range of issues arising from the relationship.
Estate planning documents such as wills and powers of attorney should also be considered alongside a BFA. While a BFA can address what happens to assets during the parties’ lifetime, it does not replace the need for a will that deals with the distribution of assets after death. Parties should review their estate planning documents when entering into a BFA to ensure consistency between the various arrangements and to avoid unintended consequences.
Need Help With Your Binding Financial Agreement?
Binding financial agreements offer valuable protection for your assets, but understanding their limitations is crucial for making informed decisions about your financial future. Knowing what a BFA can and cannot cover allows you to plan more effectively and seek additional arrangements where necessary.
As binding financial agreements lawyers in Australia, my law firm can help you understand whether a BFA is right for your situation and what complementary arrangements you might need. We offer transparent, fixed fee costs so you know exactly what to expect. Contact our team today by calling 1300 529 888.