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It has been almost 15 years since Pre-nuptials were allowed to be entered into by Australian couples. Nowadays, these Agreements can also be entered into by de facto couples both before and during a relationship.

We are now starting to see a greater number of couples separating and these Agreements are being tested by regular applications made to the Court to set them aside.

There is a dangerous misconception among some lawyers, accountants, and financial advisers that these Agreements can be done in a simple manner by using off the shelf precedents or some other simple cut and paste job; sadly, that is not the case.

There is more law involved as more and more changes are made to the legislation and more and more cases are decided each day. It has become imperative that these Agreements are detailed and particular.

Recently, we have seen several badly drafted Agreements come across our desks. We highlight below some of the flaws of such an Agreement and explain what could have been done to fix them:-

  1. Definition of the word “property” – This is a common error and a dangerous one. In the family law area, there is legislation and a well-developed line of cases that tell us what “property” means. That is developed even to the extent that assets held within a Discretionary Trust are often treated notionally as property of the parties. Superannuation interests are also included notionally as property of the parties.

    One of the Agreements we saw recently simply referred to the word “property” but offered no definition of what that was. There can be no doubt in such a case that the common law meaning of property would not encompass assets in a Trust nor superannuation interests. Therefore, upon that particular couple separating, all the assets held in valuable Family Trusts and in substantial self-managed superannuation funds no longer were protected under the Agreement but could be subject to a claim in the Family Court.

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  3. After acquired property/substitution/accretions – Often when people draft these Agreements, they think only about what they have at the time and do not anticipate what may happen in the future. It is impossible to anticipate with precision what the future holds and once again this is why it is important to include definitions and be detailed about how “after acquired property” is to be dealt with. One needs to turn their minds to what will happen if a certain property is sold, used as security or suddenly produces an income in the future. What happens to that property and/or the property acquired from that original property? This is also a common mistake that we see in Agreements. Often, we see that the Agreements refer only to property in a Schedule and do not refer to any future acquired property. As such, in 15 years when the parties separate and have a whole different class of property they own or interests, the Agreement is useless.

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  5. Failure to disclose and value property correctly – This is an extremely important aspect of Pre-nuptial Agreements, especially in wealthy matters or where there are a number of businesses involved. We see this catastrophic mistake made on numerous occasions. In cases where there is a power imbalance due to the fact that one party has substantial assets (and/or substantial business and property interests) and the other party does not, then a very detailed disclosure of that parties’ interests to the other party is required. There must be sufficient time allowed for the other party to consider an inspection, make inquiries and/or even obtain a valuation if they want to. In many cases, the other party (being the less wealthy party) will not insist upon inspecting documents of valuing the other party’s interests but that does not mean that disclosure should not be offered. It is extremely important that information in complex financial documents is explained in easy-to-read language and the other party is given every opportunity to make due and diligent inquiries. This does not mean that in every complex case massive amounts of money need to be spent on valuations – however, if one puts forward an estimate of value in a Pre-nuptial Agreement and that estimate is so far off the real mark as to the actual value of that asset, then this could be deemed to be fraud or effectively, a non-disclosure.

    In wealthy matters, we often see Schedules attached that are only one page long and refer to things such as “Husband’s interests in the business – estimated $10 million plus”. Such a disclosure and estimate of value in our view is insufficient and dangerous as it leaves the Agreement open to challenge at a later date.

    Disclosure of current financial documents together with adjustments to reflect market value and balance sheets of any assets are imperative. All interests in property (if one wishes to protect them from any claims in the future) must be identified and the value must have some foundation. It cannot just be a guestimate.

 
A Pre-nuptial Agreement or a Cohabitation Agreement is not for everyone. However, if you and your partner decide to enter into one, then it should be done properly in an accurate and detailed manner with proper reflection over time. These Agreements are important and cannot be rushed or done shoddily. If done properly, they will provide greater piece of mind to the couples entering into them.

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