Financial Agreement

A financial agreement is intended to govern how the division of property will be shared by the couple during separation or divorce. Unlike other agreements, a financial agreement is a sort of “contingency agreement”. In other words, the couple sign it at some point in their lives and actually “forget” it. However, on the “crucial day”, i.e., separation or divorce, the financial agreement will guide the couple and will pave the way. Therefore, the questions arise: What is a financial agreement? Should you sign a financial agreement? What happens if the couple did not sign a financial agreement? How to approve a financial agreement and give it legal validity?

Since the financial agreement raises many questions, I decided to write the following comprehensive article, where I will explain in detail regarding financial agreements.

What do the divorce proceedings involve?

Matters of division of property between spouses, are only one part of the whole process, called the “divorce proceeding”. During the process of divorce, the couple separate in all aspects of life, starting with the divorce itself up to regulation of shared custody of the children of the couple. This article will discuss the issue of financial agreements, which are part of the laws of division of property between spouses. In order to understand the big picture, I’ll first explain what the divorce proceeding are, what they includes and then explain and review the law regarding the division of property between spouses. Finally, I’ll will discuss the issue of “financial agreement”.

Divorce proceedings including the issue of divorce itself and the issue of child custody and alimony. Divorce in Israel is conducted according to the religious law that applies to the couple. In other words, the law of the Rabbinical Courts Jurisdiction (Marriage and Divorce) 5713- 1953 states that marriage and divorce in Israel will take place according to the law of the Torah. In other words, a Jewish couple who want to get a divorce must apply for divorce in the Rabbinic court. They will have to prove the existence of a cause for divorce among the grounds recognized by the religious Jewish law (i.e. infidelity, physical defect, refusal to have intercourse, etc.). The divorce claim will be heard before tree judges of the Rabbinic court.

Alternatively, a divorce can take place with the consent of the couple, by signing a divorce agreement. In this case, the couple file for divorce by consent, before the Rabbinic court. In such cases, divorce proceedings will be faster than the divorce proceeding conducted without consent.

Division of property in practice

A prenuptial (or financial) agreement is part of a wider area of laws regarding division of property between spouses. This area is regulated by law called “Financial Relations Act, 5733-1973” (the “Law of Property Relations”). Married couples or couples living together and have a joint household, usually accumulate, during their life together property which is common, whether it is the apartment they live in, flats for investment, pension funds, savings, other valuable property, vehicles used by the couple etc. If the couple live together, the question of belonging and the distribution of the common property, is irrelevant. However, when the couple want to separate or divorce, the question of how the division of the joint property will be done is a fundamental question that often brings couples who are in divorce proceeding to battle long and complicated legal battles.

In fact, the Property Relations Law states a legal “Default”, when a couple want to divorce and divide their common property that was accumulated during the marriage. The legal default in the Property Relations Law, is called the “Balance of Resources Arrangement”. This Arrangement determines that during the separation or the termination of marriage, there will be an equal division of property between spouses, and in accordance with the Financial Relations Act, one must consider the “general common property” of the couple. The definition of the term “common property rule” also applies to provident funds, savings, pension that was saved by each spouse, retirement compensation and more. Hence, at the time of divorce, the division of property between spouses is equal.

That being said, every rule has its exceptions and so does the Balance of Resources Arrangement. The first exception is the existence of a financial agreement that regulates the division of common property in a different way. I will elaborate on this matter later. The second exception is the types of property which are not included in the arrangement. These “properties” are: Disability pension or widow’s pension paid to one of the spouses, property one spouse inherited, property that belonged to one of the spouses before marriage or their life together and old age pension each spouse receives from the Social Security. All these will not be taken in to consideration when balancing the common property.

Financial agreement – in practice

As mentioned, the default according to the Financial Relations Act is that the common property of the couple is divided equally between them, according to the Balance of Resources Arrangement determined in the law. The exception is, as mentioned, the types of property that will not be taken in to account and the other exception is a financial agreement.

A financial agreement is an agreement between a couple which aims to divide the property in a different way, according to the couple’s will. This is a contract for all intents and purposes. If the couple want to divide the property in a different way that the law states, they can do so. A financial agreement is an agreement that can be signed before the marriage or during the marriage. Article 1 of the Law of Property Relations defines a financial agreement as follows: “An agreement between spouses regulating financial relations between them (hereinafter – the financial agreement) and a change of such agreement shall be in writing.”

In fact, a financial agreement is a special agreement where the couple can sign it but do not have to realize it. This being said, this agreement has substantial consequences that could be realized many years after being signed. A financial agreement has to be authorized by the family court   (or Rabbinic court) if it is signed by a married couple. The judge will not authorize the agreement unless he/she is sure the couple understand its context and future consequences.

I am asked by clients, not once, if it is worth their while to sign a financial agreement. To this I can answer that, as anything else in life, a financial agreement has pros and cons but I generally think it is a good idea to sign one. Obviously, one should check each case individually, according to its circumstances and according to the clients’ best interest.

Below I will describe some of the pros and cons of a financial agreement.

What are the pros of signing a financial agreement?

Creating certitude: a financial agreement is a contingency agreement. The couple can sign it and then forget all about it, so to speak. If the couple do get to a stage where separation and divorce occur, the financial agreement might cause certainty for both spouses. From the moment it is signed, the couple know what their rights in the common property are. They know that there should be no dispute because the matter of property and assets has been regulated in the financial agreement. The couple can be calm because they know what their financial right will be, if case of a divorce.

An efficient mechanism for solving disputes: if a couple do not sign a financial agreement then they will act according to the Financial Relations Act. In such cases, some disputes might arise, regarding a specific property, the common property in general, how to realize it etc. One would ask: Why not sign a financial agreement? All disputes could be solved within it (i.e. determine in advance what will be done with each property in each case). Why not solve future disputes before they arise? The couple will be able to prevent dispute as well as save a large sum of money which would go to legal procedures, in case of a divorce.

What are the cons of signing a financial agreement?

Harming the trust between the couple: many couples claim that signing a financial agreement proves that there is distrust between them. I cannot ignore this claim, it is a valid claim.  There are cases where people sign a financial agreement for fear that, in case of a separation of divorce, they will have to part from property which is theirs or share it with a spouse. On the other hand, signing a financial agreement indicates a mature conception of reality. Today we are in love and happy, but you never know what will happen future. Therefore, signing a financial agreement may create some distrust at first, but eventually you will realize that the signed agreement is for a good purpose.

The financial agreement doesn’t always reflect true reality: as a family lawyer, I come across situations where a financial agreement is signed by partners who are not equal in their financial abilities. The need to sign a financial agreement arises when one side has more financial abilities and the other has less. In such cases the agreement might deprive the “weaker” partner (financially), because the agreement was signed at the request of the stronger party who wants to protect his/her property.

Which matters should be included in a financial agreement?

As a family lawyer, I have had my share of preparing financial agreements and customizing it for the needs of my client. Based on this, I will discuss a few subjects that should be regulated in nearly any financial agreement. The following is in no way a replacement for actual specific advice.

The couple’s house and mortgage: usually, the couple’s house is the most significant asset they have. In many cases, they have a mortgage on the house. It is very important to regulate this subject in the agreement, i.e. what will happen to the house if the couple divorce, who will purchase it, will it be sold to a third party? Will the couple have priority in purchasing the house (as in BMBY – buy me-buy you). One of the things that can be determined is that the custodial parent will stay in the house until the children reach the age of 18 and then it will be sold. Other maters can be decided on too, for example, what will happen with the mortgage, how will it be removed, what effect this will have to other assets. As mentioned, each case is reviewed individually.

Regulation of property not included in the Balance of Resources Arrangement: As mentioned, there are types of property which are not included in the balance of resources arrangement, one example being an apartment which one of the partners received by inheritance. I think that in order to prevent any doubt or aggravation one should include in the agreement, instructions regarding the property which is not included in the arrangement. You could determine that all the property will be divided between the couple but there is the option of clarifying or exclusion of types of property. Adding this instruction will prevent misunderstandings in the future, from my experience.

Intellectual Property: have you written a song or a book? A play? Computer software? Anything such as the above examples which you may receive benefits of intellectual property? In such cases, it is advisable to regulate what will happen during the separation. A partner is entitled to some of the emoluments of intellectual property if the work was created during the couple’s life together, therefor it is advisable to determine this subject in the agreement so as to prevent dispute and heartbreak.

Regulation of business reputation: If, during the marriage, you have started a business or have got business reputation, your spouse is entitled to a share of its worth. It is best to clarify in the agreement what will be the fate of these rights so as to prevent disputes etc.

Determination of a sanction: let us imagine a scenario where you have drawn an agreement with you future spouse, you have signed it and authorized it, you got married and after a few years you decide to get a divorce. It is safe to assume that you will return to the agreement so as to regulate the matters of common property. Let us continue with our imaginary story – you got a divorce but after some time you accidentally found out that your ex-spouse had much property (such as an apartment, which was concealed from you or registered in a different person’s name) you were not aware of during the time you were drawing the agreement and during your marriage; not doubt there is good cause to cancel the agreement. This situation could be solved ahead, within the agreement, by determining a financial sanction which will be inflicted on the party that “cheated” or “misled” the other side.

Can a financial agreement be canceled?

The answer is yes, but with limitations. Cancelation of a financial agreement is usually the cancelation of a verdict which was validated in a court. It is for this reason that the cancelation is complex and irregular. In order to cancel an agreement one must provide serious evidence. A mistake done by lack of attention of discontent will not do. One has to show a significant fault in good faith and the agreement. Cancelation of such an agreement is very rare, but it has happened in the past.

Some case that justify (sometimes) cancelation of the financial agreement

Misleading: a financial agreement signed when one was misled is not an agreement signed in good faith. If one can prove that he/she were misled by providing serious evidence there is the option to file for cancelation of the agreement.

Exploitation: a financial agreement that leaves one of the parties with much less financial rights, while exploiting the ignorance or misunderstanding of the other party, does not reflect the true wish of both spouses. For example, if the agreement is made but one of the parties doesn’t speak the language or understands the true meaning of the agreement, and the agreement deprives that person in an extreme way, that person has the right to file for cancelation of the agreement.

Coercion: a financial agreement that was made by forcing one party is not really an agreement. It was signed due to force and not real will. Coercion can exist through violent means, God forbid, but could also be done in a polite, qualitative, way. For example, an agreement signed by one of the parties fearing extortion or some other fear, is signed under coercion. In such cases too, one can file for cancelation.

Note of warning: as I have described, getting a financial agreement canceled is very complex. Net every case of wrongdoing or harming one’s rights will bring to the cancelation of the agreement. It is very important to consult with a lawyer in such cases.

Two more subjects I’d like to refer to, regarding financial agreements: standing up for your rights is not a cause for cancelation. If one party insists on his/her rights during the signing of the agreement, there is no cause to cancel it. The second issue is delay. If you feel that you were deprived in the agreement, or you have a cause to file for cancelation, don’t delay. The longer you wait, the strength of your cause will weaken. It is therefore important to act efficiently and quickly in such cases.

To sum

The law stated that if there is no financial agreement, the couple’s property will be divided equally. If you would like to have a different division you need to draw a financial agreement. This agreement will regulate the way the property will be divided, according to the couple’s wish, if they decide to separate or divorce. This agreement has many pros but some cons too. It is important to get legal counseling form a family lawyer before signing a financial agreement. Specific legal advice suited to the couple can maximize their gain.