How Financial Agreements can benefit you & your family!

By Slee Anderson & Pidgeon | September 13, 2017 | 0 Comment

Financial Agreements are also commonly known as Binding Financial Agreements, Pre-Nuptials Agreements, Prenups and Post Nuptials Agreements. 

We call it the ‘Relationship Safety Net’.

Here we share an example of a family that could have avoided a nasty set of circumstances involving not just their property, but the family business as well.  If they had a Financial Agreement or had received other legal advice regarding the structure of their assets before things went sour the outcome could have been quite different and undoubtedly more desirable for everyone involved.

The Smith Dairy Farm Saga

Mary and John Smith many years ago established a Dairy Farm, they both work on the farm and were in partnership in the dairy farm business. 

They had 2 children James and Rebecca.  Rebecca had no interest in dairy farming and left the farm to pursue other interests.  James loved the dairy farm and started being actively involved in running the farm since his teenage years.

James joined the partnership in his early 20’s with his parents.  This partnership agreement was not documented with a written partnership agreement.

When James joined the partnership, everything was owned jointly between Mary and John.

Although James was working on the farm and it was planned he would continue to do so, eventually taking over complete operation of the farm as he parents got older, Mary and John wanted to make sure that Rebecca received her fair share by way of an inheritance.  It was intended that James would buy out Rebecca.

One day, James met a lovely girl named Lisa.  James and Lisa got married, then moved in together and had children.    Eventually, Lisa joined the family farm partnership.  Lisa did minimal work on the farm as she was raising young children but there were taxation benefits in having her in the partnership.  Again, no written partnership agreement, just tax and financial records.

Whilst Mary, John and James were in partnership (before his marriage to Lisa) they brought more land.  Initial land had ownership on the title in different proportions to the partnership they were operating and then more land was purchased in the same proportions as the partnership.

After James’ marriage some more land was brought with Mary and John as joint tenants and James and Lisa as joint tenants.

James and Lisa build a new house on land owned on the title by just Mary and John.

Various plant and equipment was purchased over the years in various names but just added to the partnership as it existed at the time.

After about 10 years, James and Lisa separate!!

James starts proceedings in the Family Court as Lisa won’t let him see the children.  Lisa adds financial matters to the proceedings.  The Proceedings are very acrimonious and John and Mary are joined to the proceedings as almost all the assets are co-owned by John and Mary.  This provides significant stress for John and Mary and as a result of the stress Mary has medical issues arise.

The assets consist of the farm (the land, stock and equipment), furniture, motor vehicles and a small amount of superannuation.

Eventually, an agreement is reach for a large cash payment to Lisa with John, Mary and James having to borrow money and mortgage properties to do so. 

The dairy farm business was then burdened with significant loan repayments which have a flow on effect to the operation of the business.

Bad.

So, how might a Financial Agreement and legal advice about the business structure might have helped the Smiths?

1. If James and Lisa had entered into a financial agreement about property matters then although James and Lisa might have still been in Court about children’s matters, property would have been resolved as per the agreement and the Mary and John would not have been involved.
   1. The agreement may have provided that any interest that Lisa had in the land and business partnership was transferred to James and Lisa received a cash payment of a specified amount (probably an amount significantly lower than she received)
   2. The agreement may have quarantined the existing farm and then provided how any expansion was to be dealt with.
2. If James had sought advice about preparing a Financial Agreement, then the business structure issues could have been identified. This would have alerted James of the potential issues with their business structure and James and his parents could then obtain advice to restructure the business to protect their interests.
   1. After advice and factoring in the costs involved such as transfer duty, CGT and GST, they may have implemented an alternate business structure and the ownership of assets and the operation of the business may have been different and even without a Financial Agreement the outcome might have been different.
   2. This process would have also identified any Estate Planning issues for John, Mary and James.
      1. As part of the Estate Planning process, a plan could have also been developed for Lisa and perhaps included in the terms of the Financial Agreement.
3. If James didn’t want to ask Lisa to enter into a Financial Agreement or Lisa refused to enter into a Financial Agreement, what could be done?
   1. Then, preferably before they married, James and his parents could have considered asset ownership including what entity was going purchase and own future assets and how the business could be structured to minimise what James owned and controlled for example:
      1. A discretionary trust with Mary & John being the trustees, appointors and guardians of the trust could have been established.
         1. Future assets could have been purchased by the trust.
         2. Perhaps a company could have been formed with the shares owned by the trust.
         3. Perhaps the trustee could be a company with the shares of the company to be held by Mary and John.
      2. To ensure James and Lisa retained their incomes they could have become employees of the business and received a wage/salary as opposed to drawings from the partnership as needed.
   2. Mary and John could have been given advice as to whether to allow James and Lisa to build on the land solely owned by them.

The Conclusion

Financial Agreements certainly have their benefits and are one of the best ways of protecting your future interests, however, if your significant other, or you for that matter do not want to enter into a Financial Agreement, there are other ways to ensure that your assets are protected.  The take away recommendation is to always get advice early to make sure you know where you stand with the law.  It will undoubtedly save you time, money and a fair amount of anguish in the long run.

If you would like to read more about Financial Agreements, check out our other articles “Relationship Safety Net” and “Binding Financial Agreements.  What are they?  Do I need one?“. 

Need personalised advice on how a Financial Agreement could benefit you?  Contact our office and book an appointment!

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The contents of this publication are not legal advice to anybody who receives it and should not be treated as legal advice. You should not take any action following reading this publication without legal advice concerning its application or relevance to your own circumstances.