Prenup warning for second marriages as courts crack down
Couples blending their families need to take extra care with financial agreements, say lawyers.
Previously married couples planning new nuptials need to have a frank discussion about their property and financial agreements for current – and future – children before they walk down the aisle again.
The nation’s most senior courts are sending powerful messages about their readiness to untie the knot of unfair prenuptial agreements forced upon a spouse and their children.
“Reassure your partner that it is not because you have any doubts about the relationship but more about being pragmatic, especially if both partners are coming from an earlier relationship and want to protect their wealth for their children,” says Fiona Reid, a family lawyer and managing director of Reid Family Lawyers, which specialises in negotiating divorce settlement.
Chris Balalovski, a partner with financial consultancy BDO Australia, says many couples in happy relationships are trying to insure against the financial and emotional impact of a split with detailed agreements.
“They are increasingly sophisticated in family law matters and increasingly comfortable with the legal process,” he says.
High rates of divorce and relationship breakdowns are being made worse by COVID 19’s contribution to rising unemployment, financial loss and familial stress caused by forced lock down.
The High Court, the nation’s highest, and the Family Court have recently ruled that unfair agreements under which undue influence was used to obtain agreement of a spouse could not be upheld.
The High Court case involved an overseas bride in her 30s whose 67-year-old wealthy property developer partner said the wedding would not go ahead unless she signed a pre-nuptial agreement that in effect excluded her – and any future children from their relationship – from his will.
The agreement, signed four days before the wedding, was rendered void despite the woman agreeing after warnings from two financial advisers.
In another recent decision the Family Court unwound a prenuptial agreement that failed to disclose more than 90 per cent of the value of the husband's assets.
Binding Financial Agreement
Keturah Sageman, a partner with Nicholes Family Lawyers, says agreements at risk include those under which there is inadequate or no disclosure, or which inaccurately estimate asset values.
“For example, an agreement that grossly underestimates the value of assets in an agreement could be considered fraud or non-disclosure and be set aside by a court,” Sageman says.
The legal term for a prenuptial agreement in Australia is a binding financial agreement. They offer couples, particularly those who have been divorced before, a means of preserving their assets if the relationship breaks down.
“But the Family Court will look straight through strategies intended to thwart [the court's intention to look after both parties],” says BDO’s Balalovski. “Most strategies are not fail-safe – it is misleading if anyone is advised an agreement is watertight."
Consider your wider asset base. That might include a house, equities, life insurance and superannuation.
—Brooke Reardon, principal lawyer with Wills & Estates
Those considering a binding financial agreement need to seek separate legal and financial advice about its effect, advantages and disadvantages.
“The agreement will not be binding unless you do,” Reid says.
She says the agreement must make provision for how existing and additional property that might be acquired during the relationship, which can even include pets, will be dealt with in the event of a relationship breakdown.
In addition, it should detail ongoing financial support for each other.
Brooke Reardon, principal lawyer with law firm Wills & Estates, says: “Consider your wider asset base. That might include a house, equities, life insurance and superannuation.”
An imminent inheritance might also need to be included as an asset.
Anna Hacker, national manager of estate planning with Australian Unity Trustees, says disputes involving blended – and estranged families – account for about 80 percent of legal issues over wills.
“Couples usually enter blended families with their eyes wide open,” Balalovski says.“It might be their second or third marriage and they have already been through the time-consuming and emotionally bruising experience of a break up.”
About 4 per cent of Australian families are blended, according to the Australian Institute of Family Studies. These include families with two or more children, at least one of whom is the natural or adopted child of both partners and at least one other child who is the step-child of one of them.
Problems can arise if a parent dies after entering a subsequent relationship and the surviving spouse decides to favour their own children or changes their will so that nothing goes to the deceased’s children.
The recent $4 million claim by a daughter of former Australian prime minister Bob Hawke against his widow, Blanche D’Apulget, highlights the potential for trouble when there is disagreement over the terms of the will.
Prevention strategies range from clear instructions in a will about distribution through to considering having an adult child as an executor, trustee or attorney alongside the spouse in the interest of all siblings.
“If your intention is to keep everything separate, make sure you live that way during the relationship,” Reid says.
That includes maintaining separate bank accounts; dividing expenses equally reflecting contributions to any real property bought together on the title of the property; and keeping detailed records of contributions made from your separate property to your joint property, she says.
“A prenup will also ensure capital gains tax rollover will apply, which has the effect of disregarding any capital gain or loss arising on the transfer,” says Mark Chapman, director of tax communications at H&R Block.
The receiving spouse is in effect treated as if they had always owned the asset and will be liable to CGT on the full capital gain when they ultimately dispose of it, he says. A similar exemption applies to stamp duty.
Reference: 'Prenup warning for second marriages as courts crack down', The Australian Financial Review, 25th of August 2020