Protecting Family Wealth in the Event of a Divorce in England and Wales
“How do I protect my (family) wealth if we were to marry and subsequently divorce?” is a common question posed by clients. Sarah Hogarth from Edwards Family Law outlines the currently favoured options in England and Wales.
When it comes to protecting assets, the best strategy is to be prepared. It is much easier to take precautions before getting married; it can, however, be a perilous path to cross. Financial manoeuvres should not be made in an underhanded manner with a clear intent to defeat a future spouse’s claims on divorce. The family court is highly adept at spotting such actions. That aside, careful and considered financial planning can be beneficial where there is significant family wealth to protect.
Is It Easier to Protect a Loan or a Gift?
When gifting significant sums of money, parents or other family members often have concerns about what will happen to it in the event of a divorce. Financial gifts often have little protection when couples divorce. However, money provided as a loan from a family member is much easier to protect. In the event of a divorce, the contribution is likely to be viewed as a liability that needs to be repaid, thereby preventing the money from being included within the matrimonial pot for division.
“Prenuptial agreements are currently dealt with under common law, as there is no specific statutory regime making them legally binding in England and Wales.”
Loans are one method for protecting family wealth during a divorce, but they can still be disputed. One spouse may argue that the loan was actually a “soft loan” or gift, which was never expected to be repaid. If the court agrees, the money will be factored into a final settlement.
To avoid this happening, it is important to put a loan agreement in place detailing the total amount being lent, the reason for lending it, and the terms and conditions for repayment. The agreement should be signed at the time the money is lent. Retrospective loan notes made at the time of (or in anticipation of) divorce will be transparent to the court.
Are Prenuptial and Postnuptial Agreements Valid in England and Wales?
Entering into a prenuptial agreement before marriage, or a postnuptial agreement afterwards, will help set out how the assets are divided between spouses in the event of a divorce. Provision is typically made for any property, liabilities, income and any applicable spousal or child maintenance.
Prenuptial agreements, in particular, have been painted by many as unromantic and there are often negative connotations around one party receiving an unfair deal. In reality, making these arrangements while a relationship is in a good place often helps couples make much more rational and fair decisions about how their assets are to be shared should the worst happen.
Family cases in England and Wales involving prenuptial agreements are currently dealt with under common law, as there is no specific statutory regime making them legally binding. However, in practice, significant weight will be attached to them so long as the following criteria are met:
- they are freely entered into;
- both parties received sufficient financial disclosure;
- both parties received independent legal advice; and
- perhaps most importantly, the agreement does not lead to an unfair outcome for one party.
Parties should always seek specialist family law advice so that the guidance given by the Supreme Court in Radmacher v Granatino (2010) is followed.
Can Trusts Protect Family Wealth in the Event of a Divorce?
Setting up a trust to preserve wealth for future generations is one of the most effective ways to protect family wealth from divorce. Family members can place assets within a trust to ensure that they remain with the intended beneficiaries.
Although trusts can be very effective, they are also open to attack by the family court for a number of reasons, including (but not limited to) the following.
- The court can challenge the validity of the trust by finding an issue in its technical creation or determining it to be a “sham” trust. In order to be valid, there must be an intention on the part of the “settlor” who provides the trust assets to create a trust. There must be certainty as to what the assets of the trust include and who is to benefit from them. A carefully drafted letter of wishes at the point of formation of a trust is both vital and a document that the court would likely want to see if questions are raised surrounding the trust.
- Often an argument put forward is that the trust should be viewed as a financial resource of one party. As described previously, careful consideration needs to be given by the settlor at the point of inception of the trust. The court has sometimes relied upon the concept of “judicious encouragement”, particularly where trust funds are required to ensure the needs of a party are met. The court can make an order that will “judicially encourage” the trustees to exercise their discretion in favour of the divorcing beneficiary.
- The court also has the power to vary a trust if it is found to be a “nuptial settlement”. To do so, it is necessary to prove that the trust benefits one or both parties to a marriage (or any children) and has specific reference to a marriage. Nuptial settlements can be entered into before or after the marriage. This is also significant in terms of enforcement – given that where a variation is ordered, the court thereafter is entitled to enforce its order directly against the trust and the trustees, not simply the parties to the marriage.
Conclusion
Fundamentally, the court will always look to ensure that both parties’ needs are met in the event of divorce. However, it is certainly possible to build robust protection for family wealth with advanced planning. It is equally important to understand the potential implications for each option should the marriage break down. Therefore, it is always advisable to take legal and associated professional advice at the earliest opportunity.
