Pre-Relationship Planning: Protecting Assets Before Marriage or a De Facto Relationship

In the excitement of a new relationship, planning for a potential separation is often the furthest thing from anyone’s mind. However, taking proactive steps to protect your assets before entering a marriage or a de facto relationship is a prudent and increasingly common strategy in Australia. For individuals in Melbourne and across Victoria, where property prices and accumulated wealth can be significant, understanding the legal mechanisms available can prevent immense financial and emotional distress down the line. This article explores the essential tools for pre-relationship asset protection, focusing on Binding Financial Agreements (BFAs), the critical distinction between gifts and loans, and the importance of meticulous record-keeping.

The Landscape of Relationship Law in Australia

Under the Family Law Act 1975 (Cth), the court has broad powers to divide property between couples after the breakdown of a marriage or a de facto relationship. A de facto relationship is legally recognised when two people, who are not married, live together on a “genuine domestic basis.” The court considers various factors when determining a just and equitable property settlement, including the financial and non-financial contributions of each party, as well as their future needs. This means that assets owned by one party long before the relationship began can be subject to a claim. It is this far-reaching power that makes pre-relationship planning not just a good idea, but a financial necessity for many.

Binding Financial Agreements (BFAs): The Ultimate Protection

A Binding Financial Agreement, colloquially known as a “prenup,” is the most robust tool available for asset protection in Australia. A BFA is a private contract between two people that formally sets out how their assets, liabilities, and financial resources will be divided in the event of their separation.

When Can You Enter a BFA?

BFAs can be made at several stages of a relationship:

• Before a de facto relationship or marriage (under Section 90B or 90UB of the Family Law Act).
• During a de facto relationship or marriage (under Section 90C or 90UC).
• After the breakdown of a relationship (under Section 90D or 90UD).

For pre-relationship planning, a BFA made under s 90B or s 90UB is the relevant instrument. It allows parties to “contract out” of the court’s jurisdiction for property settlement, providing certainty and control over their financial futures.

What Can a BFA Cover?

A BFA can be drafted to cover the entirety of the couple’s property or be limited to specific assets. This can include:

• Existing Assets: Real estate, business interests, investment portfolios, and inheritances owned by each party at the commencement of the relationship.
• Future Assets: How assets acquired during the relationship, including future inheritances or earnings, are to be treated.
• Superannuation: Division of superannuation entitlements upon separation.
• Spousal Maintenance: The agreement can include or exclude provisions for spousal maintenance.

Example: A Melbourne-based doctor with a substantial property portfolio and a share in a medical practice is engaged to a university lecturer. Before marrying, they enter into a BFA that quarantines the doctor’s pre-existing properties and practice shares, stipulating that these will remain her sole property upon any potential separation. Assets acquired jointly during the marriage, such as their shared home in Toorak, will be divided according to a pre-agreed formula.

The Importance of Independent Legal Advice

For a BFA to be legally binding, both parties must have received independent legal and financial advice before signing the agreement. The agreement must contain a signed statement from each party’s lawyer confirming that this advice was provided. This is a strict requirement designed to ensure that both individuals fully understand the implications of the agreement and are not under duress. Failure to comply can render the BFA void.

Gifts vs. Loans: The Perils of Family Contributions

It is common for parents or other family members to provide financial assistance to help a couple purchase a home or start a business. However, the legal characterisation of this assistance—as either an outright gift or a loan—can have significant consequences during a property settlement.

If the funds are considered a gift to the couple, they are typically treated as a contribution on behalf of the party whose family provided them, but the asset purchased (e.g., the house) becomes part of the shared asset pool to be divided. If deemed a gift to one party only, it is still factored into the overall settlement.

Conversely, if the funds are structured as a formal loan, the amount is treated as a liability of the relationship and must be repaid to the lender from the asset pool before the remaining property is divided. This protects the lender and ensures the funds are returned.

The Deed of Gift or Loan: Your Essential Evidence

To avoid ambiguity, it is crucial to document the nature of the financial assistance in a legally enforceable document.

• Deed of Loan: This is a formal agreement that sets out the terms of the loan, including the amount, interest rate (if any), repayment schedule, and what happens in the event of default or separation. A registered mortgage over the property can provide further security.
• Deed of Gift: If the intention is to make a gift, a deed can formally record this, preventing one party from later claiming the funds were a loan that needs to be repaid.

Example: A couple is purchasing their first home in the Melbourne suburb of Brunswick. The parents of one partner provide $200,000 towards the deposit. Without any documentation, the court may struggle to determine the parents’ intention. If the couple separates, this could become a major point of contention. Had the parents and the couple signed a Deed of Loan, that $200,000 would be recognised as a debt to be repaid to the parents before the remaining equity in the home is split.

The Unsung Hero: Meticulous Record-Keeping

While BFAs and deeds are powerful legal instruments, their effectiveness can be enhanced by diligent record-keeping. In any family law matter, the ability to trace the source and application of funds is invaluable. Clear records can substantiate the claims made in a BFA or prove the existence of separate assets.

Key records to maintain include:

• Bank Statements: Showing the state of your accounts at the beginning of the relationship.
• Property Valuations: Establishing the value of real estate or other significant assets at a specific point in time.
• Share and Investment Records: Tracking the performance and ownership of investment portfolios.
• Business Financials: Balance sheets, profit and loss statements, and partnership agreements that clarify business ownership and value.
• Records of Financial Contributions: Documentation of any significant financial contributions made during the relationship, such as paying for renovations or clearing a debt.

Conclusion: A Foundation for the Future

Pre-relationship asset planning is not an act of distrust; it is an act of financial wisdom and foresight. It provides clarity, certainty, and protection for both parties. By understanding and utilising the tools available—from the comprehensive protection of a Binding Financial Agreement to the simple clarity of a Deed of Loan and the foundational support of good record-keeping—individuals in Melbourne can enter into a marriage or de facto relationship with confidence.

At our firm, we specialise in providing tailored advice to help our clients navigate the complexities of family law and wealth management. We encourage anyone with significant assets or complex financial affairs to seek expert legal advice to build a secure foundation for their future, no matter what it may hold.

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Disclaimer: This article provides general information and is not a substitute for professional legal advice. Your circumstances are unique, and you should consult with a lawyer to discuss your specific needs.

To discuss a tailored asset protection strategy for your circumstances, contact the specialist wealth management and legal team at our Melbourne office today.