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Unromantic? Maybe, but a pre-nup is your insurance policy

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The demand for prenuptial agreements (prenups) has risen over the past decade for multiple reasons. Protecting an inheritance is important and with more couples marrying later in life, they're often acquiring more assets independently. Then there are couples embarking on second and subsequent marriages who have already been through a settlement.

As well as prenups there are postnups and agreements made within marriages and de facto relationships - and they all come under the broad term of a binding financial agreement (BFA). Lawyers often work with financial advisers and accountants to draft the agreements. People who have been through previous settlements often want to keep finances separate but share holiday expenses or day-to-day living costs. This maintains a degree of financial separation and protects the parties against inheritance issues, says Vanessa Mathews, a director at Mathews Family Law.

The most common reason for having a BFA drafted during a relationship or marriage is that someone wants to protect a pre-existing or anticipated asset, for example, an inheritance.

should i get a pre nup

Through a BFA, the couple can quarantine that inheritance from the relationship so that if they do separate it's been locked away and is no longer up for negotiation. This might extend to gifts or a pre-inheritance.

While there are pro forma documents people can download, you need a solicitor for each party to sign a statement of legal advice. "My advice is to run a mile from pro formas or someone who says they can do it for $1000," says Malcolm Gittoes-Caesar, principal at Coleman Greig lawyers. "They are not a simple area of the family law jurisdiction - get a specialist in family law to do it."

How it works

Gittoes-Caesar says when he first sees a client he checks they've had a conversation with their partner first, and then he goes through the assets and liabilities of each person and asks what they want to do.

"I ask, do they want to protect all their assets or make provisions for their partner? And what happens if they have children, or sell something and buy something else?" he says.

"I try to get people to think about what happens in the event that they separate.

"In my practice if one person has significant assets and the other doesn't have much, I don't think it's fair to have what's mine is mine and what's yours is yours. I like the wealthier partner to think about providing for the other."

Sometimes the prenup can take into account the length of a marriage or relationship. For example, if the couple is together for two years, the agreed separation amount is $X; if they are together for two to five years it's $Y, and so on. Others might agree that on separation the one with more money will buy the other a property up to a certain value, or they might say they will buy a property now and if they separate they will get half each. Sometimes there are provisions for any children.

After the agreement is drafted, Gittoes-Caesar says he recommends people speak to their partner, who will then need to obtain independent advice.

"We can only ever act for one party because there's conflict - what's good for one person isn't necessarily good for the other. We never lay eyes on the other person," he says.

Once signed by lawyers and the couple, the agreement hopefully goes into a drawer never to be looked at again.

A good prenup or postnup is one that holds up when the relationship does not.

"Court can take so long and is so expensive that if something is clear and everyone believes it's fair then they save themselves tens of thousands of dollars and years in court," says Gittoes-Caesar.

"For some people BFAs are unromantic as a notion but it's like insurance - you're spending an amount of money at the start and you're hoping not to use it, but if you do you have certainty and you're covered. If you're protecting millions of dollars, a $20,000 investment at the start makes good commercial sense."

How much it costs

A basic BFA can cost from about $3500 to $7500, and then there is the added cost of around $1500 to $3000 to cover the cost of independent advice for the party being presented with the document. More complex agreements can cost up to $10,000 for the draft, with the advice cost rising similarly.

"The best thing to save money is to go to a lawyer well prepared with notes, having also reached agreement on the purpose with their partner," says Vanessa Mathews. "It's not about being able to completely articulate what needs to be done, but if you can describe what you want to achieve, then it's up to the lawyers to document.

"If people come to us and say, 'I'm going into a relationship but I own my house and I'm happy for the other person to live in it, but what if they make a claim against my house,' then I understand they are trying to preserve their pre-relationship asset.

"But what if they are together for 10 to 20 years and have children, what should happen in the increase in value of the house, what if the other partner pitches in money to renovate - how will they define what is their part of the house and what is not?

"Some people come with very detailed instructions on who is going to pay for what, but then you have to balance the details with more reasons to set aside. If it says we will contribute into everything equally and something happens to derail that, does the rest of the agreement hold?"

According to Kirstie Day, director at family law specialist Naughton McCarthy in Brisbane, many people are turned off by fees - because a BFA doesn't come cheap - but it's a small price to pay compared with trying to get a court-ordered agreement at the end of a relationship.

Day says she had a client with a BFA from 2009 who separated a few years ago. The BFA was detailed and the couple knew exactly what they had to do. It was very quick to transfer and it gave them the time they needed to focus on their daughter, she says.

Weighing up the risks

Day says that as long as you meet the requirements of the Family Law Act, current cases are leaning towards upholding BFAs, but the requirements are quite strict.

"Parties have to be full and frank in disclosure to one another, and they need to provide documents to each other to evidence their financial position, and then they need to have ample time to understand the financial position of each other and the proposals they are making to each other," she says.

"It's really a process that takes a fair amount of time and commitment from the parties and their lawyers and they need all that time to understand if what they're thinking of entering into is fair for each other.

"There are some clients where I've done repeat agreements for different relationships," says Day.

"The third relationship fell apart in the process, but the client was pleased to know early before continuing with the relationship."

It was once thought that having children would cause a prenup to be voided. However, Day says that when you look at the circumstances of the agreement, if both parties are of child-bearing age it is usually understood the agreement was made with this in mind so it won't necessarily be voided.

"We often recommend people have a sunset clause that brings the agreement to an end at a certain point in time or they review their circumstances and make a new agreement," she says.

There is still the impression that BFAs can be overturned, says Gittoes-Caesar.

"Courts scrutinise them. There's a level of uncertainty, but if they're done properly and are fair to everyone it reduces the risk of it being set aside. They are not 100% foolproof - there is no way I would ever guarantee that an agreement won't be set aside because there's always the risk."

However, despite this Gittoes-Caesar says he's never had one set aside or had any flare-up in 20 years of practice.

Where prenups can go wrong

Things can go sideways if the BFA doesn't meet the technical requirements, or if the agreement is so oppressive or one-sided that it would cause hardship if it were upheld.

"I've seen situations where I'm not prepared to go ahead because it's so one-sided," says Day. "When the prenup draft is given close to the wedding date, where is the client's real ability to say no?

"I had one situation where a wife came to me with a draft agreement. She'd come to Australia for the relationship on a visa and had insecurities, with English not her first language. I looked at the agreement she was given and I told her it was so one-sided that I couldn't sign it. The other lawyer said, well, the church bells won't be ringing on Saturday. They then negotiated a better agreement and the wedding went ahead."

Many lawyers are reluctant to draft a prenup because they hold a large profesional liability risk. "If you're young and building up your finances, we don't know what will happen in your future," says Day.

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Julia Newbould is a financial writer and commentator with a background in journalism. She was previously editor of Financial Planning and Super Review magazines; managing editor at InvestorInfo and at Morningstar Australia. Julia co-authored The Joy of Money, a book on women and personal finance. She holds a Bachelor of Economics from the University of Sydney where she serves on the alumni council.
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