First published in April 2024, LSJ Online, legal updates here. Co-Authored by Niki Schomberg at Lander & Rogers
SNAPSHOT
- Wealth protection in romantic relationships can require a suite of legal documents including a binding financial agreement, deed of release and will.
- The relationship between binding financial agreements and estate claims is an evolving area of law rarely tested by the courts. As the ‘great wealth transfer’ takes place, it is expected there will be more litigation in this space.
- Due to the interplay of succession and family law, collaboration between family lawyers and estate lawyers is advised to ensure client instructions are carried out upon separation and death.
Australia is expected to see the largest intergenerational wealth transfer in history as the ‘baby boomers’ pass their estates onto younger generations. Simultaneously, rates of separation and divorce are increasing, as are second and subsequent relationships and blended families. As a result, lawyers are seeing an unprecedented demand from clients for wealth protection plans to ensure their legacy is carried out upon death.
The difference between separation and death
Both a will and binding financial agreement will be utilised in any well thought out estate plan. A binding financial agreement is made pursuant to the Family Law Act 1975 (Cth) (‘FLA’), which is federal legislation, whereas the law regarding wills and deceased estates is governed at State and Territory level.
A financial agreement can be made before or during a marriage or de facto relationship, or after divorce or the breakdown of a de facto relationship. Different sections of the FLA govern each type of agreement. This article will focus on pre-separation agreements.
The FLA states that one of the matters a financial agreement can deal with is the property or financial resources of either or both the spouse parties in the event of the ‘breakdown’ of the marriage or de facto relationship.‘Breakdown’ is defined in section 4of the FLA as being not a breakdown of the marriage or de facto relationship ‘by reason of death’.
A financial agreement comes into force and effect upon a separation declaration being signed by one of the spouses. The separation declaration must state that:
- the spouse parties lived in a de facto relationship (if the agreement relates to a de facto relationship, not a marriage);
- the spouse parties have separated and are living separately and apart at the declaration time – the Court has held that spouses can live ‘separately and apart’ even when they both reside in the same home (Crabtree v Crabtree (1963) 5 FLR 307); and
- in the opinion of the spouse parties making the declaration, there is no reasonable likelihood of cohabitation being resumed.
Conversely, a will takes effect upon the death of the will-maker.
This means that if a party to a binding financial agreement dies before the agreement comes into effect (e.g. the relationship ends due to death rather than separation), then the agreement, insofar as it relates to how the property and wealth of the parties are to be dealt with, will not be binding upon the executors of the deceased party’s estate. Instead, the executors are bound by the content of the deceased party’s will.
If, however, a binding financial agreement comes into force prior to the death of one of the spouse parties, the FLA provides that the agreement will continue to operate in favour of, and is binding on, the legal personal representative of the deceased party. The agreement will take precedence over the terms of the deceased party’s will and its terms will be carried out.
If one or both parties to a binding financial agreement die after a breakdown of the relationship, the requirement for a separation declaration ceases to apply (sub-s 90DA(1A) or 90UF(2) of the FLA).
Estate planning and family provision applications
In New South Wales (‘NSW’), if a spouse is not adequately provided for in the will of their deceased spouse, they may apply for a further provision order under Division 1 of the Succession Act 2006 (NSW) (‘SA’). This application must be brought within 12 months of the date of death.
Where a spouse claims further provision from an estate, the court will consider whether the deceased spouse provided adequate provision for the proper maintenance, education or advancement in life of the claiming spouse. Further considerations are set out under section 60 of the SA, for example:
- any financial contribution by the claiming spouse to the acquisition, conservation and improvement of the
estate for which adequate consideration was not received by the claiming spouse; - whether the claiming spouse was being wholly or partly maintained by the deceased, and to what extent;
and - the financial resources, including earning capacity, and both present and future financial needs of the
claiming spouse.
Unlike other jurisdictions in Australia, in NSW a person can waive their right to claim for further provision from a deceased estate. Such a waiver will only be binding if approved by the Court pursuant to section 95 of the SA. A person seeking that release must satisfy the Court as to certain matters under subsection 95(4) of the SA. The terms of the deed of release can provide that the waiver is only effective on certain conditions. For example, it might provide that in the event the parties are not separated at the date of death, one party leaves the other certain
assets or rights under their will.
Documents often drafted as part of the suite of estate planning documents are: 1. a binding financial agreement, 2. a deed for release of a right to claim for further provision, and 3. a will. Under the will, the testator may decide to leave nothing, or very little, to their spouse. A life interest, a right to reside in real property, or an interest in a testamentary discretionary trust are examples of this. These types of gifts would support a disappointed spouse’s claim for further provision from the deceased spouse’s estate if there was no approved release pursuant to section 95 of the SA.
Subsection 95(2) of the SA provides that the release can be approved after the death of the person whose estate benefits from the release. There are several NSW authorities where disappointed surviving spouses have filed for further provision orders and have faced a cross-claim by the estate seeking approval of a release documented in a pre-separation agreement (see, for example, Dark v Dark [2016] NSWSC 1223, Neil v Jacovou [2011] NSWSC 87 and Russell v Quinton [2000] NSWSC 322). While subsection 95(2) of the SA allows for approval after the death of the person whose estate benefits from the release, it is usually prudent to seek the approval of this release before death. This is because the Court must have regard to all of the circumstances of the case and not just the circumstances that existed when the deed was signed. In considering all of the circumstances, the Court has dismissed applications for approval of releases in pre-separation financial agreements after the death of a spouse
where there has been:
- inadequate legal advice received by the surviving spouse releasing their right to claim against the estate in a financial agreement;
- non-disclosure of assets and financial information by the deceased party when entering into a financial agreement;
- overt pressure by the deceased party for the other spouse to sign a financial agreement; and
- unfair terms of the financial agreement.
For these reasons parties may, after discussion with their legal representatives, make the strategic decision to seek approval of the deed after separation and implementation of the financial agreement. At this time the Court can be satisfied each spouse has adequate assets for their future support. Anecdotally, it is easier to obtain approval of a deed following implementation of a financial agreement or property settlement (rather than seeking approval at the time of execution of a deed, entered into contemporaneously with a financial agreement).
In jurisdictions other than NSW, where there is no legislation allowing for a spouse to relinquish their future right to make a claim upon an estate, an executor of the deceased’s estate may still propound a pre-nuptial agreement (including a financial agreement that is not binding pursuant to the FLA) as evidence of the parties’ intentions as to the division of their assets. Case law indicates the courts are likely to consider these agreements where they include covenants that spouses will not challenge each other’s will (see, for example, Kozak v Matthews [2007] QSC 203).
Maintenance
A financial agreement can also deal with the maintenance of either of the spouse parties to a marriage or de facto relationship. Maintenance is separate to the adjustment of property: it is an amount of money provided by one spouse party for the financial support of the other.
Financial agreements made for married couples can deal with maintenance during the marriage, after divorce or both during the marriage and after divorce. Financial agreements made for de facto couples can deal with maintenance in the event of a relationship breakdown.
There is no requirement that a separation declaration be made for provisions relating to the maintenance of the parties to come into effect.
Where a maintenance order is made by the Court pursuant to section 74 or section 90SE of the FLA, the order automatically ceases to have effect upon
- the death of the payee or payer under the order; or
- the marriage of the payee, unless in special circumstances the Court orders otherwise.
There are, however, no similar provisions in the FLA that provide for cessation of a parties’ obligation to pay maintenance pursuant to a financial agreement in the same circumstances. As such, an obligation to pay spouse maintenance pursuant to a financial agreement will not end upon the death of a party to the agreement and is binding on the legal personal representative of that party pursuant to section 90H or 90UK of the FLA.
In the event of the death of the payee, the surviving payer spouse may wish to file an application seeking to set aside the agreement if there are grounds to do so pursuant to section 90K of the FLA (particularly paragraph 90K(1)(d), which relates to a material change in circumstances of the care, welfare and development of a child).
Drafting takeaways for financial agreements
A party’s estate plan should be considered when drafting any financial agreement. The intentions set out in a
party’s will and financial agreement should be consistent, and a prudent family law practitioner will work with the client’s estate lawyer when drafting a financial agreement, or request a copy of the client’s will (if already prepared), to ensure consistency.
Clear advice should be given to a client about:
- the different role each document plays in relation to estate planning and asset structuring;
- when each document will come into effect; and
- how the content of a financial agreement may be relevant if a family provision application were to be made in the future.
In NSW, it is prudent to enter into a deed of release at the same time as a pre-separation financial agreement. Serious consideration should be given to the timing of obtaining approval pursuant to section 95 of the SA, noting this should be obtained prior to the death of either party. This may be an ongoing discussion to have with legal advisors as circumstances change, for example when a party updates their will.
In respect of maintenance provisions in a financial agreement, it may be appropriate (depending upon which party the practitioner is acting for) that clauses be drafted such that the obligation to pay maintenance terminates upon:
- the date of death of the payer or payee; and
- the date a party in receipt of maintenance marries or enters a de facto relationship with another person (or is in a de facto relationship for a specified period).