Serious Talk About Finances Before “I Do”
What is prenuptial agreement and why should you discuss it with your partner before you get married?
Prenuptial agreement (or a Binding Financial Agreement) is a contract between you and your partner which can be entered into before you commence a de facto relationship or before you marry. It outlines how your assets and finances are handled in the event of divorce or separation. Have this conversation early, usually when you and your partner are talking about your future together, including moving in together, purchasing property together or considering marriage.
Even before a proposal, you should communicate how to manage your finances as a couple and if a prenuptial agreement is right for you.
A prenup delves into how financial matters will be handled if the marriage ends in divorce or separation. While it may seem unromantic, a well-structured prenup fosters open communication and sets the foundation for a financially responsible marriage.
What is Prenuptial Agreement, Myths Debunked
Unfortunately, misinformation about prenups is widespread. Here are five common myths that need debunking:
Myth 1: Prenups are only for the wealthy
Despite common misconceptions, prenups are not just for the wealthy. They serve as a practical tool for financial transparency and security. Anyone with assets, debt, or financial responsibilities may benefit from a prenup. Even if you do not have substantial wealth now, a prenup protects your future earnings, inheritance, and investments.
Myth 2: Signing a prenup means you expect the marriage to fail
Signing a prenup signifies a commitment to transparency and trust. Couples who discuss financial matters early on are better equipped to handle future challenges together.
Myth 3: Prenups are unfair and one-sided
TV shows and movies depict prenups as something that benefits the “rich” half of a couple, but this is not true. For instance, a prenup that states one partner receives almost no assets in a long-term marriage, while the other keeps everything could be challenged in court. A prenup must be signed by both parties, voluntarily after both parties have received independent legal advice on the agreement. Courts may not enforce prenups that are overly biased or that were signed under duress.
Myth 4: Prenups are always unbreakable and unchallengeable
While a valid prenuptial agreement offers significant legal protection, it is not an absolute guarantee. Prenups are contested under certain circumstances. For example, if one partner fails to disclose a significant offshore bank account during the prenup negotiations, that could be grounds for the agreement to be challenged.
Courts retain the power to review and potentially invalidate provisions of a prenup if they find it to be unconscionable (unfair), the result of fraud or duress, or if there was inadequate financial disclosure. This means that while a prenup offers a strong framework, it is not entirely immune to legal challenges.
Myth 5: Prenups are the only way to protect your finances in a marriage
While most couples will sign a Binding Financial Agreement before marriage, they can enter into a Binding Financial Agreement after they are already married. A Binding Financial Agreement might be considered during a marriage when couples experience a financial change, such as receiving an inheritance or starting a business together.
What is Prenuptial Agreement Financial Protection?
A prenup outlines various financial protections so you and your partner enter the relationship or marriage with clear expectations. Here are some key aspects that prenuptial agreements cover:
Protecting separate property
If one partner owns a business, real estate, or other assets before marriage, a prenup may be designed to keep these assets separate in the event of divorce. Otherwise, it may negatively impacts company ownership.
Managing debt
If one partner has significant student loans, credit card debt, or other liabilities, a prenup defines who remains responsible for them. If your partner enters the marriage with $50,000 in student loan debt, the prenup may stipulate that this debt remains the sole responsibility of your partner. This prevents you from becoming unfairly burdened by your partner’s pre-existing debts.
Planning for spousal support
A prenup specifies terms for alimony or spousal maintenance or may waive it altogether to reduce uncertainty in case of divorce. This avoids lengthy legal battles over financial support. For example, a prenup may specify a lump-sum payment instead of ongoing spousal maintenance to provide a clean break and predictable costs for both parties. This is especially helpful in cases where one spouse has been out of the workforce for an extended period.
Inheritance planning
If you want to safeguard certain assets for your children from a previous marriage or family members, a prenup provides legal protection. For example, you have children from a previous relationship. A prenup protects specific assets, like the family home you built with your former spouse, are passed down to your children from your previous marriage. You protect the home from potentially going to your soon-to-be spouse, their children, or your shared children in the event of your death or divorce.
Prenup agreement limitations
There are limitations to your prenuptial agreement.
For instance, prenups cannot dictate child custody arrangements or child support. Although you can enter into a separate Binding Child Support Agreement for child support.
Next, a prenup will need to meet all the requirements of the Family Law Act to be a legally binding agreement. A prenup may also be capable of being challenged if it is excessively unfair, one-sided, or were agreed upon under duress or through fraud). The requirement to obtain independent legal advice prior to signing an agreement is designed to reduce the risk of an agreement being challenged.
A prenup may need to be reviewed throughout the marriage, particularly if the circumstances of the relationship change significant, for example, upon the birth of a child.
What is Prenuptial Agreement Step-by-Step
Your prenup should be fair and legally valid to make the possible divorce process smoother and more effective in the future. Here is a step-by-step guide through the prenup discussion:
Step 1: Initiate primary discussions
Approach the topic of getting a prenuptial agreement with honesty and sensitivity. Emphasise the importance of financial clarity and long-term security. This conversation should happen well before an engagement, it should be considered before living together or intermingling finances. Consider discussing past experiences with money, financial goals, and any concerns about merging finances.
Step 2: Identify assets and debts
Before drafting the prenup, both partners should take inventory of their financial situation, including savings, investments, properties, business ownership, and liabilities. Transparency at this stage avoids future disputes and to ensure both parties fully understand the financial landscape they are entering. As parties will be legally represented during the process, they will usually obtain valuations and exchange relevant documents to identify assets, debt and superannuation.
Step 3: Negotiate and draft the agreement
The Australian court makes legal representation mandatory when entering into a Binding Financial Agreement. Have your respective lawyers oversee the negotiation and drafting process so that you and your partner create a fair and mutually beneficial agreement.
Step 4: Review and sign the prenuptial agreement
Review the document before signing to confirm full understanding and agreement. Ensure that the agreement is executed as required, which includes having your lawyer sign the agreement. The prenup should be stored securely after execution to protect its validity and protect it from damage, loss, or unauthorised alteration, which could compromise its validity and enforceability in the event of a dispute. You should obtain advice well before the wedding.
Step 5: Review and update (optional)
While often overlooked, reviewing a prenup every few years ensures it remains relevant, especially if your financial situations change over time. These changes could be due to career advancements, inheritances, or major investments. Many couples choose to revisit their prenup at significant life milestones, such as the birth of a child or the purchase of a home.
Here is a quick checklist to help you navigate the prenup process:
- Discuss finances openly with your partner.
- Identify key assets and debts.
- Hire independent legal counsel.
- Determine terms for spousal support, property division, and debt responsibility.
- Negotiate fairly and transparently.
- Sign the document with your lawyer.
- Review the agreement periodically so that it remains relevant.
What Courts Consider in Honouring Your Prenup
A prenup makes divorce easier financially. However, courts consider several factors when evaluating the validity of your agreement (if challenged):
First, the courts will consider fairness. As outlined in the Family Law Act 1975, the Australian Court focuses on equitability in distributing finances. A prenup cannot be overwhelmingly one-sided or unjust. Courts will assess if you and your partner had fair representation and equal opportunity to negotiate terms.
The court also emphasises that the prenuptial agreement is entered into voluntarily. If you or your partner were pressured or coerced into signing, the prenup may be invalidated.
Finally, there should be full financial disclosure. Concealing assets during prenup negotiations can lead to legal challenges and may render the agreement void.
While prenups provide legal clarity, they are contested under specific circumstances, such those involving fraud, duress, or lack of proper legal representation. Courts aim to uphold agreements that were made in good faith and under fair conditions.
What is Prenuptial Agreement Going to Cost You?
While prenups are drafted to prevent costly legal battles in the future, they come with an initial investment of around $5,000 to $10,000. Factors affecting its costs include:
- Lawyer fees: More experienced lawyers may charge higher rates, but their expertise ensure a well-drafted agreement. Take note that family lawyers in major cities tend to have higher rates compared to those in smaller towns.
- Negotiation time: The more revisions needed, the higher the cost (especially if you pay your lawyer by hour). If you are well-prepared and communicate openly, you may reduce negotiation time significantly.
- Asset complexity: If multiple properties, businesses, or investments are involved, legal fees may increase. High net-worth individuals may require more detailed agreements.
Couples should communicate expectations clearly, organise financial records, and seek the expertise of experienced legal professionals to manage prenup costs better. Mediation services are also cheaper compared to court proceedings, so you reduce overall expenses.
Planning for a Secure Future Together
A prenup is not about planning for divorce, it is about building a secure financial future together. Open conversations about finances can strengthen relationships and help couples align their long-term goals. A prenup removes financial uncertainty, so couples focus on their shared future with confidence.
For personalised legal guidance about your prenup, contact us for a consult with a family lawyer. With the right approach, your Binding Financial Agreement can become a stepping stone to a financially stable and transparent marriage.