Binding Financial Agreements: A strategic tool for family wealth preservation

For families focused on building, managing and transferring wealth, considerable attention is rightly given to investment strategy, tax efficiency, corporate and family governance, estate planning and succession. Yet one potentially significant risk to family wealth is often only considered after it has already materialised: relationship breakdown.

Over approximately the next 20 years, an estimated $5.4 trillion is expected to pass from one generation of Australians to the next.¹ For families contemplating a transfer of wealth, the challenge is not simply transferring it successfully but preserving it once it reaches the next generation. This is where Binding Financial Agreements (BFA) can form an important part of a family's broader wealth management strategy.

A BFA is more than the "prenup"

BFAs are frequently associated with what is referred to as the "prenup": an agreement entered before marriage, or before entering a de facto relationship, which sets out, amongst other things, how the property, liabilities and financial resources of the parties will be dealt with in the event of a separation. In Australia, the application of BFAs is considerably broader, and they are increasingly used by families as part of succession planning, business continuity and intergenerational wealth transfer.

A BFA is a written agreement that allows a couple to, amongst other things, determine how some or all of their assets, liabilities, superannuation and financial resources will be treated if their relationship ends. Depending on the circumstances, agreements can be entered into at any stage of the relationship, including before a marriage or de facto relationship, during the relationship, or following separation. This makes BFAs relevant at multiple stages of a family's wealth journey.

A family member may enter a relationship already owning significant assets or expecting an inheritance. However, substantial wealth is often created during a relationship. They may establish or grow a business, receive an inheritance, become a beneficiary of a family trust, acquire interests in family entities or become involved in an intergenerational succession plan. Each of these events can provide an opportunity for the family to consider whether a BFA should form part of its broader wealth planning.

Every Australian couple already has an “agreement”

One way to understand the value of a BFA is to recognise that, in a sense, every Australian couple already has a framework that determines what may happen financially if they separate. The real question is whether that framework has been chosen deliberately. Where there is no BFA, the parties' financial arrangements following separation are governed by the Family Law Act 1975 (Cth). Even where a dispute is resolved through negotiation rather than litigation, the statutory framework informs the range of outcomes against which settlement negotiations take place.

Importantly, this framework does not produce a certain or guaranteed outcome. The family law legislation deliberately gives the Court extensive discretion to account for the many different ways relationships are formed, operated and evolve. Accordingly, this means it is rarely possible to predict with certainty whether a party would receive precisely 40%, 50% or 60% of a property pool. Instead, family law advice is generally expressed as a range of possible outcomes.

For families with significant wealth, the difference between the upper and lower ends of that range can represent millions of dollars. A properly prepared BFA offers an alternative. Rather than leaving the financial consequences of a future separation to negotiation or ultimately judicial discretion, a BFA allows the parties to decide in advance how particular assets, business interests, inheritances or categories of family wealth will be treated.

Relationship breakdown can become a business event

For high-net-worth families, the consequences of separation may extend well beyond the separating couple. Where family businesses, private companies, trusts or significant investment structures are involved, relationship breakdown can affect liquidity, succession planning, business continuity and, in some cases, reputation.

The Australian case of Morris and Morris, decided in 2024, provides a striking illustration of how significant those consequences can be.² In this case, the wife received 27.5 per cent of a net asset pool worth approximately $741 million, totalling approximately $204 million. To meet the settlement, the husband was required to pay the wife approximately $182 million, which involved selling a substantial proportion of his shares in a publicly listed company. The sale of the husband’s shares caused him to lose majority control of the entity and the sell-down, compounded by the reputational effect of the family law proceedings, were reported to have triggered his forced exit from the entity that he had founded and operated for approximately 44 years prior.

For business-owning families, the takeaway from this case is that family law property settlements can affect not only the personal wealth of the separating parties, but also the family's broader liquidity, shareholdings, corporate control and succession plans. A BFA can therefore serve a purpose well beyond protecting an individual's balance sheet. It can form part of a broader strategy for protecting family wealth and business structures by ring-fencing those interests from any future property settlement under the Family Law Act 1975 (Cth).

Benefits of a BFA: certainty, control and privacy

Complex family law property settlements can also involve lengthy negotiations, substantial professional costs and prolonged uncertainty. Where litigation becomes necessary, families may also lose a degree of privacy surrounding their financial and personal affairs.

Although Australian family law judgments are anonymised, individuals and families may still be identifiable where distinctive corporate, trust or investment interests are involved. Judgments can also contain considerable detail about the parties' finances, communications and personal relationships.

A well-drafted BFA cannot prevent the emotional consequences of relationship breakdown. What it can do is reduce one potential source of uncertainty by establishing an agreed framework for how assets, liabilities, superannuation and financial resources are to be dealt with at separation, rather than leaving those aspects to be dealt with under the Family Law Act 1975. For families concerned with preserving wealth, maintaining control of business structures and protecting privacy, that certainty is valuable.

When should you consider a BFA?

BFAs should be considered in much the same way as other risk-management strategies. For families, there are a number of key life and wealth events where it may be appropriate to consider whether a BFA should form part of broader planning, including when:

• a family member enters a serious relationship or becomes engaged;
• substantial wealth is being accumulated by one member of a couple;
• a family member receives or expects a significant inheritance;
• a business experiences substantial growth or a liquidity event;
• children begin participating in a family business;
• a family member becomes involved in a family trust or other family structure; or
• a family begins succession or intergenerational wealth planning.

The conversation is therefore not confined to the period immediately before a wedding. Rather, BFAs entered during relationships may be particularly relevant where a family's financial circumstances have changed substantially since the relationship commenced.

Building the agreement to last: pillars of a “watertight” BFA The effectiveness of a BFA depends heavily upon both its drafting and the process through which it is entered.

A strong agreement requires careful compliance with the Family Law Act, appropriate financial disclosure and independent legal advice for each party. Timing is also critical. Agreements raised well in advance generally allow both parties sufficient opportunity to obtain advice, consider the proposal and negotiate its terms.

By contrast, presenting a BFA shortly before a wedding can create obvious difficulties if one party later argues that they had little practical choice but to sign. Consideration should also be given to whether the agreement makes appropriate provision for changing circumstances. Depending on the family’s circumstances, this might include the birth of children, changes in wealth, inheritances or other significant life events.

The objective should not simply be to obtain a signed agreement. It should be to prepare an agreement, and follow a process, capable of withstanding scrutiny many years into the future when the parties' relationships, assets and family circumstances may look very different.

Protecting the next generation

Families may spend decades building businesses, establishing investment structures, minimising tax, preparing an estate plan and carefully deciding how wealth should pass to their children. Yet, transferring an inheritance without considering the recipient's relationship circumstances may expose that wealth to a risk the family's broader succession strategy was designed to avoid.

For some families, particularly those with substantial intergenerational wealth, a BFA can sit alongside estate and succession planning, trust structures, shareholder arrangements and investment strategies as another component of long-term wealth preservation and risk management.

Entering into a BFA does not mean assuming a relationship will fail. Rather, it allows families and couples to make considered decisions about financial risk while relationships are functioning well, rather than leaving those decisions to be negotiated at one of the most difficult points in their lives.

For families who have spent years creating, structuring and planning the transfer of wealth, recognising when a BFA should be considered can be an important part of protecting not only the wealth they have created, but the legacy they intend to leave behind.

¹John McLeod, The Bequest Report: Reshaping Australia by Passing on More than Assets (Report, JBWere Australia, July 2024).
²Morris and Morris (No 7) [2024] FedCFamC1F 12.