Why a handshake agreement can cost you thousands later

When couples separate, most want to avoid conflict, save money and keep things amicable. This often leads to “handshake agreements”- informal arrangements about finances that aren’t documented or legally formalised.

While these agreements may feel simpler at the time, they can expose you to significant financial risk, increased legal fees and major disputes many years down the track. Here’s why relying on a handshake agreement can cost you far more than you ever expected.

Handshake agreements are not legally enforceable

Unless your agreement about finances is formalised in consent orders or a binding financial agreement (BFA) that complies with the Family Law Act 1975, it is not legally binding. This means:

• either person can change their mind at any time and may seek a larger or different settlement in the future;
• you cannot compel your former partner to comply with an informal agreement; and
• you have no legal protection if the agreement breaks down.

Your ex may be able to ask for more later

Informal arrangements do not prevent a former partner from applying to the Court for a different property settlement or spousal maintenance in the future.

When determining a property settlement, the Court considers the value of assets and liabilities at the time of the hearing, not at separation. This means assets accumulated long after separation (including inheritances, property value increases, business growth, or windfalls) may still form part of the divisible asset pool.

There are cases where people who have never formalised their settlement have found themselves litigating 10 to 20 years later, with significantly altered asset pools.

Further, the Court is not required to uphold an informal agreement. It must make orders that are "just and equitable" based on the circumstances at the time the matter comes before it. The outcome may be very different to what you and your ex-partner had previously discussed and intended.

You could lose your rights to a financial settlement

Strict time limits apply when seeking property settlement or spousal maintenance orders:

• for married couples: 12 months from the date the divorce order takes effect; or
• for de facto couples: 2 years from the date of separation.

If this limitation period expires, you can only proceed with the Court's permission, which is granted in limited circumstances.

If you relied on a handshake agreement and your ex-partner later reneges, you may have lost your ability to seek legal protection entirely.

Tax relief

Transfers of property (such as vehicles or real estate) under a family law settlement may attract stamp duty and capital gains tax exemptions. However, these exemptions only apply where the transfer occurs pursuant to consent orders or a BFA.

If the transfer is made under an informal agreement, you may miss out on these exemptions and incur unnecessary tax liabilities.

The bottom line

Trying to “save money” by not formalising your settlement can lead to:

• missing out on tax exemptions;
• difficulty enforcing what was agreed to;
• needing to reconstruct financial history years after separation;
• complex, costly and delayed litigation if leave of the Court is required after a limitation period expires;
• sharing the post-separation increase in the value of your assets;
• more complex negotiations if your ex-partner reneges on the informal agreement; and
• substantially increased legal fees.

A handshake agreement might seem simple, but it can leave you significantly exposed. The cost of fixing the problem later is almost always greater than the cost of obtaining legal advice and formalising your agreement at the outset.

If you’ve separated, or are considering it, it is important to speak to a family law specialist to ensure your financial arrangements are final, enforceable and protect your interests.

If you require assistance, please contact one of our experienced family lawyers.