'Til when we do part
A growing number of couples are entering into nuptial agreements. Such arrangements may seem unromantic, but for many people they are a vital source of security. Why are they of such potentially enormous importance?
Tom Farley-Hills, Partner, Harbottle & Lewis LLP
On 20 October 2010 the Supreme Court of England and Wales handed down their decision in the case of Radmacher v Granatino and, in doing so, brought about a radical change in the legal status of nuptial agreements under English Law.
Prior to this decision nuptial agreements were regarded as against public policy because they sought to override the jurisdiction of the court to determine (i) how claims arising from divorce should be quantified and (ii) what type of orders should be made to give effect to (i).
Before Radmacher, the status of nuptial agreements under English law was simple, to use a well-worn cliché: they were not worth the paper they were written on. Following the Supreme Court’s decision however, the status of nuptial agreements is that in the event of divorce, the court will uphold the terms of a nuptial agreement provided the effect of the nuptial agreement is fair. Broadly speaking, fairness requires the court to be satisfied that a party and the children have enough money to meet his/her/their financial needs to re-house and enough to pay the bills. Fairness may mean something a little different in cases where the parties have been married a long time or where a spouse has placed him or herself in a financially disadvantaged position because he or she looked after the children. Fairness is a moveable feast and the parameters of it have not yet fully formed. Ultimately, a judge retains the final say on whether any nuptial agreement should stand.
Increasingly, since Radmacher, the courts are holding divorcing couples to the terms of nuptial agreements entered into by them. As a result of this, increasingly the uptake of nuptial agreements amongst younger generations is increasing. Indeed, nuptial agreements are quickly becoming established as one of the primary legal mechanisms available to wealthy individuals to protect themselves and their assets against the full effects of an English divorce.
A wealthy individual without a nuptial agreement places his worldwide assets in the hands of the English divorce courts and for the following four reasons this is likely to be disastrous:
1. Everything and everywhere
Almost uniquely in the world, there is no marital property regime under English law. What this means is that all assets, regardless of when they were acquired and how they were acquired, owned by a party at the point of divorce are a “resource” that can be used to meet claims on divorce. This may include assets acquired before the marriage, that were inherited or assets retained in the sole name of one of the parties only.
Most other countries have a marital property regime that separates marital from non-marital assets. Typically the difference will depend upon when the assets were acquired. Assets acquired before a marriage, for example will be non-marital in nature, so too assets held in one party’s sole name.
France has a number of different property regimes. Couples upon marriage can choose which type of marital property regime they want: one of the most common the Separation des biens creates a property regime where only assets that are held jointly are marital and therefore to be divided on divorce.
2. What is an asset for the purposes of divorce under English law?
The short answer is anything with a value and/or anything that produces an income however intangible or illiquid the asset may be. Unvested shares, a benefit under a discretionary trust, a minority shareholding in a company and pensions are all valued and added to the overall finances. The court must calculate the total value of liquid and illiquid assets before deciding what type of orders can be made to divide the assets between each spouse.
3. How are claims on divorce quantified?
The Supreme Court said, in determining the case White v White in 2000, that assets on divorce need to be divided fairly and that a ‘yardstick of equality’ should be applied to each spouse’s share of the assets post separation. Prior to this case, a wife’s claims (for it was nearly always wives in the position of having to seek financial provision from the courts in those days) were limited to what she reasonably needed regardless of the assets built up by both parties during the marriage. Subsequent higher court cases following White have refined the concept of sharing, so that equality of division of assets on divorce is regarded as a starting point and end point unless fairness dictates otherwise. It is not too much of a stretch therefore to suggest that a wealthy individual caught in English divorce proceedings, without a nuptial agreement, should expect to have a 50% ‘tax‘ levied on his/her worldwide wealth in favour of his/her spouse.
4. Uncertainty of litigation
If a couple cannot agree on how to divide their assets one of them is likely to issue an application for a financial order on divorce.
Courts have very wide powers to transfer assets between spouses, to order a sale or even settle in trust assets for the benefit of a spouse or the family’s children.
Given the wide discretion afforded to family division judges many different outcomes are possible. Results can be unpredictable and appealing against bad decisions is difficult.
Sometimes these wide powers are exercised by lower court judges with little regard to tax implications on sale or transfer or how a forced sale of shares may impact upon a company.
The result is that litigating over one's assets on divorce is very unpredictable and it is not unheard of for both parties to come out of a protracted court battle unhappy about the result.
Wealth protection tool
Nuptial agreements can prevent all of this happening because before a marriage (pre-nuptial agreements) or during a marriage (post-nuptial agreements) will set out what each spouse will receive on divorce and thereby the parties have a much greater degree of certainty under English law than they would otherwise without a nuptial agreement in place.
Whilst nuptial agreements cannot prevent a disgruntled spouse taking a claim to court, the spouse needs to have a very good reason why he or she seeks to depart from the terms of the nuptial agreement.
Nuptial agreements are bespoke documents and should be drawn up by a specialist solicitor with reference to the appropriate formalities which must be adhered to. They should also be drafted with reference to the parties’ circumstances at the time of the agreement but with an eye on what may happen. This requires nuptial agreements to have a degree of flexibility inbuilt to accommodate the family’s changes in circumstances over time.
Nuptial agreements can be used to protect assets in a number of different ways. They can ring fence specific assets e.g. shares in a company or an interest not yet received e.g. an interest under a discretionary trust. A broad brush approach is to create a ‘marital private property regime’ between the parties, so that a difference is drawn between assets acquired before the marriage and inherited assets from assets acquired by the couple through joint endeavour. In this way, money passed down through the family by wills or trusts can be protected from divorce litigation. A common approach, where one party has brought all of the assets to the marriage, would be to limit the potential claims on divorce to the other party’s financial needs and thereby eliminate the ‘sharing principle’ that would otherwise be a factor on divorce.
In any shape or form, nuptial agreements are the only way for a wealthy individual to protect assets from an English divorce. Anyone who is contemplating marriage, or whose child or grandchild is contemplating marriage should consider a nuptial agreement as a way of protecting wealth. Most wealthy individuals have sophisticated structures to mitigate tax, particularly when it comes to passing wealth down through generations, however few stop to consider the effect of divorce litigation on those same assets. Just as trusts and wills are seen in the private client world as essential wealth protection tools, slowly but steadily nuptial agreements will be seen in the same way.
This article first appear in the Summer 2016 edition of Rathbones Review.