The pre-nups and downs of modern marriage
10 August 2012
As divorce and remarriage become more commonplace, many are realising that it may be prudent not to rely on the promise of ever lasting love, especially where finances are concerned. Paradoxically, your spouse is probably the greatest threat to your wealth and your family's financial security should the relationship end in divorce.
The future of wealth protection - trusts, pre and post-nuptial agreements
The courts of the Family Division in England have a wide remit, jealously guarded, to adjust the wealth of the parties to a divorce, as they see fit. The result of the landmark case White-v-White in 2001 was to raise the aspirations of the claimant wife hugely and, as a result, in "big money" cases the levels of award have more than doubled. Indeed, it has been said by many that London is the "divorce capital" of the world. As a result, the effects of divorce can be altogether more destructive than the effects of taxation and/or an economic downturn, especially when the legal and emotional costs are factored in too.
In Jersey, many may not appreciate the extent to which their assets may be open to attack on divorce, or that the Royal Court of Jersey looks to the decisions of the English court for guidance. Although we are yet to see the kind of record payouts that have been made in the UK, the principles for division of the asset pot are the same as those applied in the UK. There are few of us who cannot afford to worry about financial damage limitation in the context of a divorce. The recent economic crisis, coupled with the effects of the post-White case law, has focused attention on how spouses might mitigate the threat that a divorce settlement poses against their personal assets. Indeed, it is no coincidence that as the size of divorce payouts has increased, greater consideration has been given to the wealth protection mechanisms available to individuals.
Trusts have traditionally been used for this purpose and wealth managers have creatively used them to try to shelter assets earned before the marriage, or those which the spouse may inherit under a will. However, the security provided by trusts has recently been threatened. The willingness of the English court to order much larger settlements than once was the case, coupled with its wide powers to investigate and vary trust assets and trust interests (and its increased willingness to do so), means that trusts are often as susceptible as any asset owned by the divorcing beneficiary.
The English court's powers in relation to a trust depend on whether it is a "nuptial" or "non-nuptial" settlement (broadly speaking, "nuptial" means made for the benefit of the parties to the marriage, during a marriage or in contemplation of it - it can also be settled by persons other than the parties themselves, i.e. parents of the couple). If the settlement is nuptial the English court has wide powers of variation and it can order provision to be made directly out of the trust. If the settlement is not nuptial, the English court has no powers in relation to it or over the trustees, although it can (and will, in the majority of cases) consider the trust a resource available to one of the spouses and can take it into account as part of any order, in the expectation that the trustees may be encouraged to make distributions from the trust fund to a spouse so that he can comply with the terms of the order made.
Thus, the best time to set up a new trust for the next generation is when you are young, free and single, and marriage is not even contemplated - in which case the English court will not have jurisdiction to vary the trust and it can, at best, only be taken it into account as a resource of the divorcing settlor or beneficiary.
This is relevant to Jersey as, in recent years, the English court has demonstrated an increased willingness to investigate, re-write, or on occasions, entirely ignore the provisions of Jersey based trusts which are set up by wealthy individuals both in the UK and in Jersey. As a result, even offshore trusts are not immune from attack on divorce, as was once perceived to be the case.
Pre-nups and post-nups - a belt and braces approach
The use of pre-nuptial and post-nuptial agreements (pre-nups and post-nups) has increased significantly as wealthier individuals seek to protect themselves against the ravages of financial orders on divorce and they have recently been brought to the fore as a sturdy shield in the wealth protector’s set of arms.
In relation to pre-nups, the well documented Radmacher (formerly Granatino) v Granatino judgment handed down from the Supreme Court may be of particular significance for Jersey trustees.
The case revolved around whether a prenuptial contract - designed to protect Ms Radmacher's estimated £100 million inheritance originating from the family's papermaking business - entered into between Ms Radmacher (a German national) and Mr Granatino (a French national) in Germany, three months before their marriage in London in 1988, should be binding. The pre-nup detailed the parties' agreement that neither of them would acquire any benefit from the property of the other during the marriage or on its termination.
On 20 October 2010, the Supreme Court ruled that the pre-nup should be upheld, giving such agreements legal status for the first time in UK history. It is now possible that pre-nups will be given full effect by a court making them binding on those who enter into them, as long as certain safeguards have been met. Guidance as to what those safeguards may be was given in Racmacher and include whether the parties freely entered into the agreement with full appreciation of its implications, whether there are circumstances that make it unfair to hold them to the agreement, whether vitiating factors such as duress exist and the consideration of any children of the family. This list is not exhaustive and the court will retain discretion to waive the pre-nup if it is generally unfair and since Radmacher, they have both given effect to pre-nups as well as refused to take account of them.
Thus, pre-nups can provide some certainty and agreement as to what assets have been brought into, and what assets should be taken out of, the marriage by each party. Provision can be made that pre-acquired wealth, inheritance, or trust assets, for example, should be regarded as "separate property" i.e. non-matrimonial property that will be excluded from the "pot" on divorce (to be retained by the individual who brought it into the marriage). Excluded trust assets in the pre-nup can be referred to as evidence that the parties did not intend the trust assets to be included on a divorce. This can be particularly persuasive if the spouse is also removed/excluded as a beneficiary from an existing trust from which he/she may otherwise have benefited.
Post-nups (entered into after the marriage) have also recently been catapulted onto the stage, and are also capable of being binding in England. The Jersey case of In the matter of II (18 November 2010) did not consider Radmacher (decided only a month before) but instead referred to the Privy Council case of MacLeod v MacLeod (originally from the Isle of Man). It was held that no weight would be given to a post-nuptial agreement in that case because it was not by its express terms a formal agreement, it had not been fairly arrived at, it was on its face manifestly unfair to the husband, it contained an untruth and that the husband had signed the agreement without competent advice. Whilst this finding gives some indication of how the Court may deal with any future nuptial agreement, a conclusive test case remains to appear before the Royal Court and it would be open to the court to follow Radmacher, MacLeod or take a different approach altogether.
If a pre-nup is followed by a valid post-nup the English court is more likely to hold the parties to its terms as long as they consider it just to do so in the light of any changed circumstances of the couple. The ideal course therefore may be to negotiate a pre-nup before the marriage, followed by a separate post-nup after the marriage, ideally reviewing and re-executing it every few years to take account of any changed circumstances. Arguably not very romantic, but certainly the most effective way of ensuring the agreement is as likely as possible to stand up when it needs to.
Consequently, carefully drafted pre-nuptial and post-nuptial agreements may be employed to protect the integrity of the trust against attack on a divorce. So, where a trustee is aware of the future marriage of a settlor or a beneficiary, he may wish to consider raising the topic of a pre-nup. Consideration should be given to the exclusion of the future spouse from the settlement and/or asking him or her to agree not to claim against the trust assets on a future divorce, as part of a pre-nup. Better still, why not consider both options?
Whilst the responsibility for arranging their personal and financial affairs lies ultimately with the individual beneficiary, some responsibility may also lie with the trustees to raise the question of whether a pre-nup should be considered. Not only may a pre-nup spare the trustees the prospect of being drawn into the divorce proceedings, it will also afford the settlor or beneficiary some confidence that his/her interests might be safeguarded in the event of a divorce.