What is a prenup? The pros and cons of prenuptial agreements

The idea of discussing the demise of your marriage before it has even begun can make even the mere concept of prenuptial agreements a bit of a turn off for some, and can potentially take the romance out of your courtship.

That said, a prenuptial agreement is not a guarantee that your relationship will falter, but merely a way of delineating your assets and drawing clear lines before saying “I do”, so both partners know where they stand.

According to data insights company McCrindle, the total number of divorces has been declining – in fact, there are fewer now than any time in the last 20 years. They still estimate one in three Australian marriages will end in divorce, however, so a prenup may be worth considering.

Canstar’s finance expert, Steve Mickenbecker, believes Aussies should be more concerned about protecting their assets.

“We can see that people are marrying later in life, meaning they have more assets that could need protecting if the relationship breaks down,” he said. But he added that “it’s worth considering that a prenuptial agreement may not necessarily produce a better outcome than a divorce settlement.”

So how does a prenuptial agreement work, and what do you need to know?

What is a prenup?

A prenuptial agreement or ‘prenup’ is a legal agreement between the partners in a couple, which outlines how their property and assets will be dealt with in the event of their relationship ending in separation or divorce.

You may also hear a prenuptial agreement referred to as a ‘binding financial agreement’ (or BFA for short), which is the official name for this kind of arrangement under Australian family law.

While the term ‘prenup’ suggests they’re most commonly made before a marriage starts, BFAs can also be made during a marriage, after a divorce or separation, or indeed between de facto partners.

Who is involved in a prenuptial agreement and what does it cover?

A prenup is generally made between the parties in a relationship. Tuskeen Jacobs, partner and head of Rostron Carlyle Rojas’ family law department, says anyone over the age of 18, whether in a same-sex or heterosexual relationship, contemplating marriage, already in a de facto or married relationship, can enter into one.

In addition to property and assets, your prenuptial agreement may include arrangements relating to financial support for either spouse.

Partners can also make arrangements to include superannuation so that it may be dealt with specifically in the event of separation.

Are prenups only for the famous and the fabulously wealthy? Not necessarily, according to Mr Cudmore.

“In modern times, it’s perfectly reasonable for people to want to keep what they’ve earned for themselves without having to worry about the spectre of family law looming over them.  Modern relationships require modern solutions and a prenup provides just that, contracting out of the archaic and sometimes old fashioned approach of the Family Court.”

As a prenup is generally arranged at the beginning of a marriage or partnership with the future in mind, conditional arrangements may also be included in it.

These could be events that might happen down the line such as the birth of children or the potential for an asset, such as a family business, to increase or decrease in value.

“In circumstances where two people want to ensure that the work that they put in during a relationship is reflected by what they get out in the end, they can and should consider a prenuptial agreement, as a fair and just outcome is not always guaranteed with the Family Court,” Mr Cudmore says.

How does a prenup work?

In order for a prenup or binding financial agreement to be legally binding in Australia, there are some strict rules that must be followed when it’s being drawn up.

Firstly, both parties must be on board and sign the agreement freely and without pressure or threats.

According to Mr Cudmore, you both must have received independent legal advice so that you are aware of the effect of the agreement, your rights and the advantages and disadvantages of the agreement.

“The key thing that makes a binding financial agreement binding is the fact both parties enter into it freely, without duress and with the benefit of independent advice.  This is extremely important and it’s surprising how often this step gets people into trouble.”

Any prenup not created properly can be overturned in the Family Court.

How to write a prenuptial agreement

It is advisable to consult your lawyer about the best way to writ a prenuptial agreement, and they may even be able to provide you with a template. There are also various website that offer free templates as a way to get you started on the process.

Although the inclusions or terms of a prenuptial agreement can be flexible, Ms Jacobs says a typical starting point for a prenup is to consider what assets both parties have when entering the relationship.

“Agreements will say ‘What’s yours is yours and what’s mine is mine in the event of separation, but anything we acquire jointly during the relationship will be shared, either by dividing the assets or selling them and splitting the proceeds,’” she says.

According to Wonder Legal, when writing a prenuptial agreement, it is important for both parties to provide a complete, honest and accurate account of their financial circumstances, including assets, liabilities, and income sources.

It is advisable when writing a prenup that both parties also consider what would be a fair and reasonable split of their assets in the event of a divorce.

How are disputes settled without a prenup?

Without a prenuptial agreement, divorce and separation arrangements are generally settled in court using Family Law Act principles to divide assets and reach a settlement. If a valid prenup is in place, it overrides this.

Luke Cudmore, principal lawyer at Cudmore Legal, says the main purpose of a prenup is to give couples more control over how a split would be handled.

“By entering into a prenup you are effectively agreeing to divide your assets in a certain way, outside of what the Family Court might order. You are effectively contracting out of the jurisdiction of the Family Court, which has many advantages for people,” he says.

What are the potential pros and cons of a prenup?

When deciding whether or not to get a prenup, it may be wise to consider both the pros and cons before committing.

Some possible pros of a prenup

Peace of mind

According to Mr Cudmore, the peace of mind that can come with knowing you have made arrangements for the future is a potential benefit of having a prenup.

“The parties will have clarity going forward with respect to their financial circumstances post-separation, and they can freely invest and contribute their money to the relationship knowing that they will receive a direct benefit from their investment,” he says.

Greater control over the outcome for those involved

Another potential positive of a prenup, according to Mr Cudmore, is that it would ensure that your finances are not subject to the Family Court and would instead be divided based on what the couple agreed.

He says this could be a positive outcome.

“In some circumstances, and in my opinion, the Family Law Act is out of touch with modern relationships and is sometimes too focused on awarding adjustments to parties who have not contributed, or to make adjustments based upon a disparity in earning capacity where there is absolutely no link between the disparity in earnings and the relationship.”

Potential to save money and stress in the long run

Ms Jacobs says while a BFA may be a costly and complex document to create, with both parties needing to pay for legal representation, the financial and emotional costs of taking legal action to resolve disputes via the court system or dispute resolution can be much higher.

She says going through the courts still doesn’t always guarantee a desirable outcome for both parties.

“The cost to litigate in Australia is astronomical,” she says and notes that in Australia it’s not uncommon for a one-day trial to come with a six-figure bill at the end, while couples may need to wait as long as two years for their day in court.

May provide financial empowerment for both parties

Ms Jacobs says prenups can provide people with more autonomy to negotiate financial matters when they are still happy and in love.

“They [prenups] are designed to empower both parties entering into the agreement, as each party is negotiating the terms at a time where there is harmony in the relationship and where there is not an imbalance of power, as sometimes occurs at separation.”

Some possible cons of a prenup

The cost

The cost of having the agreement drawn up and the fact that both partners must receive independent legal advice, can make getting a prenup a costly exercise.

May represent a better deal for one partner

There could be potential for the agreement to put one individual – usually the one with the most assets – in a position of control in the relationship.

According to DCH Legal Group, even if the agreement represents a “bad bargain” for one of the parties, it will still apply in the event of a separation.

Can’t always account for the unpredictability of relationships

Ms Jacobs says it can be a challenge to come up with an agreement at the outset of a marriage or de facto partnership that’s conditional on events that may or may not happen in the future.

“There’s a number of different variables that we try to include in financial agreements, such as the length of the relationship and the children that they may have, but we don’t have a crystal ball,” she says.

“If you sign up to a financial agreement where you’re contemplating that you’ll have two children but you end up with four and you’ve been out of the workforce for 10 years, the $1 million that you agreed to 20 years ago may suddenly be not as much as you thought.”

She says while you’re both agreeing to it now, you’re waiving your right to dispute it in the future.

Can imply an absence of trust

The very fact that a couple is considering a prenup can sometimes be viewed as an admission there’s a lack of trust in the relationship. This perception may be difficult to shake.

Is there a positive way to approach a prenup with your partner?

Broaching the topic of getting a prenuptial agreement with your partner can be daunting. But if you decide that it’s the best option for your financial future, there may be ways to approach the discussion openly and positively.

“I think if you are contemplating it, you need to have a discussion relatively early in the relationship, as unromantic as that might be,” says Ms Jacobs.

“It’s a conversation where you say to the other person, ‘look, I love you, I think we’re going to be together forever, but I don’t want you to feel like you can’t leave the relationship because you’re financially dependent upon me.’”

Mr Cudmore recommends being clear with your partner about what you plan to do as a couple with your combined finances and other resources, plus any expectations you each have about the assets you already own as individuals.

“I think it’s worth, at the very outset of your relationship, having a good honest chat with your partner and saying, ‘look, what do you want to do?’

“If there is a discussion and there is an expectation that you will keep what you already have, then the parties might consider entering into a prenup,” he says.

Cover image source: Antonio Guillem/Shutterstock.com