Families work hard to build up a sound business and accumulate assets, some are even lucky enough to have children interested in joining. Many business founders are concerned about protecting the family’s assets and the business from the breakdown of a relationship in the next generation. This can be addressed by a Binding Financial Agreement.
What are Binding Financial Agreements?
A BFA is a contract between two people who are living together on a genuine domestic basis and want to formulate what will happen in the event of a break up. They can be individuals that are married, intend to marry, people in same sex relationships, or in defacto relationships.
The strategic asset protection plans of families in business should incorporate BFAs for family members in domestic relationships. The aim is not to alienate your children or their boyfriends, fiancées or spouses but to educate the next generation about the need to protect the family’s wealth and the business from the effects of a relationship breakdown.
What are the requirements of executing a Binding Financial Agreement?
There are strict requirements that must be complied with when executing a BFA. These are:
1. The BFA must be in writing;
2. The BFA must be executed by both parties; and
3. Each party to the BFA must obtain independent legal advice. The lawyer must sign a certificate that they have given this advice and that they have advised their client of the advantages and disadvantages of executing the BFA and the general effect of signing it.
If the formal requirements of a BFA are complied with then, apart from the few exceptions noted below, the BFA has the effect of preventing the Family Court from deciding how the parties’ assets, liabilities and financial resources should be divided between them in the future. A properly prepared BFA can help you retain control over the division of assets in the event of a relationship breakdown.
Can the Binding Financial Agreement be set aside?
Even when the above requirements have been met, a Court may still set aside the BFA, but in those circumstances the parties can still use the BFA to show their intentions at the time it was signed and confirm the assets and liabilities of the parties. This can potentially save considerable time and money down the track if litigation is necessary.
The circumstances under which a BFA may be set aside include but are not limited to the following:
– Where there is duress or fraud. This can include non-disclosure of a material matter.
– Where a party entered into the BFA for the purpose of defrauding a creditor.
– There is reckless disregard for the interest of a creditor.
There are circumstances that have arisen since the BFA was made and it is impracticable for the BFA or part of it to be carried out or a party or child of a party will suffer hardship if the Court does not set it aside.
Who should enter into Binding Financial Agreements?
– Individuals who have significant assets or if one partner has significantly more assets than the other.
– Individuals that have interest or equity in a business and want to protect the assets and the business.
– Men or women that may be giving up a lucrative career to look after children.
– Individuals concerned about significant debt that the other party is bringing to the relationship.
– People who have been married before or who have children from a previous relationship.
– Individuals with an interest by loan account or otherwise in trust with substantial assets.
– Individuals who will receive, or anticipates receiving, a large inheritance.
– Where it is anticipated that one individual will receive interest in a trust with substantial assets.
– Where one party either holds, or it is expected that he or she will receive shares within a family company.
BFA’s should address the specific requirements needed to protect the family assets and the business to ensure that these are quarantined from the couple’s other own personal assets that they each brought to the relationship or accumulated during the relationship. Other issues for families in business to consider including in a BFA are:
– Recording an intention of a party’s family to make a gift of property and/or money and whether this gift or money will be quarantined from the rest of the assets of the couple.
– There can be provision for recording amounts of money or property given and acknowledging that it is the intention of the parties upon receipt of the money or property that it remains the sole property of one party.
Having an open and frank discussion with the next generation about preserving and protecting family assets and the family business is integral. Families should be having these discussions early and making BFA’s part of the family’s strategic asset protection plan so that children entering into serious relationships are aware that BFAs are part of the family’s agreed process in bringing a third party into the family and the business.
BFAs are certainly not romantic but they are critical in ensuring that the assets of the family and the business are protected.
Fotini Kypraios and Joanne Randello are senior associates at Meerkin & Apel Lawyers.