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Understanding the Basics of Binding Financial Agreements

— December 4, 2023

A binding financial agreement is essential for protecting your financial interests in a relationship.

Financial agreements are essential when planning for the future, especially in relationships. A binding financial agreement (BFA) is beneficial, governing your property interests in case of a relationship breakdown. Understanding this type of agreement and how it works is crucial for anyone considering entering one. Here’s what you need to know.

What is a binding financial agreement?

A BFA is a private contract between two people that specifies how their assets will be divided if their relationship breaks down. It can include property, financial resources (savings, investments, and future earnings), child or spousal maintenance, and more.

This type of agreement reduces the potential for conflict and litigation in the event of separation and provides clarity and certainty to both parties.

Why consider a binding financial agreement?

A binding financial agreement is essential to provide financial security and predictability, particularly in a relationship breakdown. These proactive agreements allow couples to determine how their assets will be divided if their relationship ends. It is a pre-emptive approach that can significantly alleviate the emotional strain and financial uncertainty often associated with separation.

By deciding on the division of assets beforehand, couples can avoid contentious and emotionally draining disputes when emotions may run high. This can save time and resources and preserve relationships, making the separation process easier. Hiring a legal professional to assist you will ensure the agreement is drafted accurately, reasonably, and in a way that reflects both parties’ specific circumstances and needs.

What are the different types of Binding Financial Agreements? 

BFAs come in various forms, each tailored to accommodate different situations and stages in a relationship. 

Prenuptial agreements, or “prenups” as they’re commonly known, are entered into before marriage. They outline how assets and finances will be divided if the marriage ends. These agreements are not only for those with substantial wealth. They can protect family inheritances, business interests, and even future earnings, offering peace of mind to couples about to tie the knot. 

Postnuptial agreements are like prenuptial agreements, but they’re established during the marriage. Couples might create a postnuptial agreement to address changes in their financial situation, such as a significant increase in assets or the birth of a child. It’s a proactive way to manage potential disputes over finances and property. 

Separation agreements are used when a relationship ends. These agreements stipulate how assets, debts, and custody arrangements will be handled. Creating a separation agreement can simplify the divorce process and minimize conflict. 

Legal requirements and validity

Two people reviewing paperwork; image by Aymanejed, via
Two people reviewing paperwork; image by Aymanejed, via

A Binding Financial Agreement must meet specific legal requirements to stand up in court. For example: 

  • The agreement must be in writing and documented clearly and comprehensively to leave no room for ambiguity or misinterpretation.
  • Both parties must sign the agreement to show they agree on the details and understand its contents and implications.
  • The agreement must include a statement to confirm that each party has received independent legal advice before signing. This shows that each person agrees that the agreement is in their best interest when signing. 

These requirements are designed to protect both parties’ interests and uphold the agreement’s integrity. Failing to meet these prerequisites could result in the agreement being declared invalid, which could lead to complications and disputes down the line.

What is the process of creating a binding financial agreement?

It’s also important to note that binding financial agreements aren’t exclusive to married couples. De facto couples, including same-sex partners, can also enter into these agreements. 

This gives them the same opportunity to protect their financial interests and gain clarity about what happens if the relationship dissolves. Creating a BFA requires patience, honesty, and guidance. It includes some simple steps. 

Step 1: Full financial disclosure: Both parties must be open about their financial situation. This includes sharing details about assets, debts, income, and other financial matters. 

Step 2: Draft the agreement: It’s best to involve legal professionals in this step as they will help you navigate the legal landscape and ensure your agreement is fair and follows all legal requirements. 

Step 3: Seek independent legal advice: Before signing the agreement, it’s essential to have a legal professional look over the finer details to help you understand any potential challenges or risks. Each person in the agreement should talk to their lawyer. 

Step 4: Signing and storing the agreement: Once everyone is happy, it’s time to sign it. Once done, make sure to store the agreement safely for future reference.

When can binding financial agreements be set aside?

In some cases, a court may set aside a binding financial agreement. This can happen if the court finds that the agreement was obtained by fraud, if the agreement is void or unenforceable, or if there has been a material change in circumstances relating to child care. That’s why your BFA must be created correctly and fairly.

A binding financial agreement is essential for protecting your financial interests in a relationship. However, it’s crucial to seek professional legal advice when creating one due to the complexity of these agreements and the potential consequences of getting them wrong.

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