A prenup, or to use its technical term “Contracting Out Agreement”, may be one of the most important documents you’ll ever sign. Approximately 10 per cent of couples have them, and they are becoming increasingly popular.
A prenup allows you to contract out of the Property (Relationships) Act and set your own rules for division of property on separation and/or death.
Not only can agreements be entered into between a husband and wife, but also civil union partners and de facto partners. Usually, they are signed before a relationship starts, although they can be signed during the relationship (aka the “mid-nup”).
So why consider one? It is the cheapest, most flexible and effective way of protecting assets from a current partner.
Unless a signed prenup is in place, all relationship property is generally divided equally after three years, subject to limited exceptions. This means the terms of your Will could be overridden in many cases by a surviving partner.
Prenups are especially important to protect existing property from a previous relationship, or to ringfence differing contributions to a future family home. They can also be used to protect inheritances, gifts and Trust distributions. As an essential part of any effective succession plan they can be used to confirm the status of assets before transferring them to a Family Trust.
A prenup can also ensure that assets from your previous relationship will pass to your children from that relationship rather than automatically passing to a new partner or their children.
For prenups to be valid, they must be in writing and signed by both parties after they have separately received independent legal advice. The same lawyer cannot act for both parties. The lawyers must witness their client’s signature and certify they have explained the effects and implications of the agreement and provided independent advice.
Valid agreements can only be set aside if they become “seriously unjust”. The Court considers the terms of the agreement, the length of time since signing and whether it has become unfair or unreasonable, and balances those against the need for certainty.
Agreements should be flexible and forward thinking. What is fair at the start of a relationship may be unfair later if one party has stopped a career to raise children, or moved cities to support their partner, and this is not compensated for in the agreement. Existing agreements should be reviewed periodically to make sure they keep pace with changes in the relationship.
A good, well thought out and simple prenup can provide both parties with certainty and security. So, it’s worth considering an agreement to ensure your assets are protected no matter what happens in the future.