For Richer, For Poorer...
17th August 2012 Annmarie Gosling and Alvaro Iraizoz Reclusa
Examining the challenges surrounding the role of pre-nuptial agreements.
Many people still have mixed feelings about the desirability of prenuptial agreements and remain undecided whether they are unromantic or simply a sensible and practical step in modern times. However, it is fair to say that this debate has become largely academic, given the Supreme Court’s decision in Radmacher v Granatino in October 2010 that parties will be held to the terms of a prenuptial agreement if those terms are deemed to be ‘fair’ by the court.
Two recent high-profile weddings have underscored some alternative methods of pre-marriage financial planning. Spain’s Duchess of Alba, the most titled aristocrat in Europe, married civil servant Alfonso Diez Carabantes in October 2011. Before the wedding, the Duchess took the step of giving her wealth to her six children in what the press called a family prenuptial agreement. Apparently, the Duchess’ intention was to show the marriage was for love, not money.
It was reported that the Duchess pre-emptively signed her children’s inheritances over to them before her death by registering them as the owners of her various palaces, property and castles on her death. This provided a neat solution for her, ensuring she retains control of the House of Alba during her life, but assuring her children of their inheritance rights on her death.
Prior to this, the Duchess’ intention to marry Sr Diez was reported to have been a matter of controversy among her six children from her first marriage to Luis Martinez de Irujo y Artazcoz in 1947 (described at the time as ‘the most expensive wedding in the world’). The children and the Duchess’ eight grandchildren were apparently concerned that the marriage may mean a substantial part of her estate could pass to Sr Diez on the Duchess’ death. The children may also have been worried that some of their prospective inheritances could have ended up being transferred to Sr Diez in the event of a divorce.
‘Family courts have a broad remit under s25(2) of the Matrimonial Causes Act 1973’
To put matters in context, the Duchess’ wealth is estimated at between GBP524 million and GBP3.5 billion. This fortune comprises various palaces, property and castles around Spain; the wealth also lies in stocks, art masterpieces and works of literature classified as Spanish national heritage. Indeed, many of her belongings, including thousands of pieces of artwork and volumes of literature in the Palacio de Liria, are protected by the House of Alba Foundation and cannot be sold without the permission of Spain’s Ministry of Culture.
Financial planning with regard to estates before death is, of course, not a new concept. But would the Duchess’ approach be a feasible option in England? In England and Wales, people enjoy total testamentary freedom and can distribute their entire estate in their will as they wish. This is subject to any claim under the Inheritance (Provision for Family and Dependants) Act 1975, although the relevant provisions only apply if the deceased is domiciled in England and Wales.
In contrast, in Spain, there is a substantial portion of a testator’s estate which the Duchess would not have the freedom to dispose of as she wished, known as the legitima. About two-thirds of a testator’s estate is designated as legitima, and passes to the testator’s children automatically under the rules of forced heirship. Also, under Spanish inheritance rules, the Duchess’ widower, Sr Diez, would acquire a life interest (known as a right of usufruct) over at least one-third of her estate.
It is feasible that a wealthy testator in England may well wish to release details of their will while they are still alive, perhaps to reassure their children of their future inheritance. However, given that marriage invalidates a will in England, they would need to wait until after the marriage to do so. It is also worth bearing in mind the power of the family courts to vary antenuptial and postnuptial settlements in financial proceedings on divorce under s24(1)(c) of the Matrimonial Causes Act 1973. The court has the power to make ‘an order varying for the… parties to the marriage… the children of the family or either… of them any antenuptial or postnuptial settlement… made on the parties to the marriage’.
The question of whether the Duchess’ dispositions would be regarded as ‘settlements’ would present more fun and games for the lawyers, no doubt, given that the definition of ‘settlement’ is open to interpretation. If they were regarded as settlements, the next question would be whether a court would exercise its power to vary such a disposition. Presumably it would, although this depends on the intention of the spouse in disposing of their interest to the children, as well as the financial means of the disenfranchised spouse and the children themselves. Therefore, such funds would not necessarily become untouchable, particularly if the other spouse could demonstrate a real need for them to be given access to such funds, which could not be met from another source.
Can’t buy me love
Another interesting approach to prenuptial planning was demonstrated by Sir Paul McCartney, who has recently remarried. Apparently, Sir Paul is no stranger to familial discord over spouse choice, although there is no such suggestion in relation to his current wife, Nancy Shevell, an American heiress. Despite Sir Paul’s acrimonious multimillion-pound divorce from Heather Mills, he reportedly remained steadfast in his refusal to enter into a prenuptial agreement. However, he and his new wife apparently agreed that she would sign a short legal document, relinquishing her right to make any claim on the trust funds of Sir Paul’s children and grandchildren.
These high-profile cases demonstrate two different approaches to financial planning by high-net-worth individuals. Indeed, a simple document such as the one signed by Nancy Shevell may be an approach worth considering, particularly if a prenuptial agreement seems too commercial a bridge to cross for love-struck couples.
However, bearing in mind again the family courts’ wide powers to distribute the finances and assets of divorcing spouses, it is unlikely that such a document could render such trusts sacrosanct in the event of a divorce, although it would of course be taken into account. Certainly, the family courts have a broad remit regarding the factors they can take into account under s25(2) of the Matrimonial Causes Act 1973, including, under s25(2)(a), ‘the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future’.
Also, as mentioned, the courts may use their power to vary an antenuptial or postnuptial settlement in certain circumstances.
While parties in a divorce cannot totally exclude the remit of the court to distribute their respective estates as it sees fit, people will continue to try various ways to curb the exercise of the courts’ discretion. The extent to which the courts will countenance this depends on all the circumstances.
The above cases are examples of two alternative approaches to prenuptial family planning. They each demonstrate attempts of older wealthy widowed or divorced individuals to balance the interests of their existing children and those of their prospective spouse. Given the principle of testamentary freedom in England and Wales, it seems likely that a court will try to respect the intentions of the party where it can, i.e. unless it would be unfair to the other party.
Annmarie Gosling is a Solicitor for the family team at Farrer & Co LLP in London and Alvaro Iraizoz Reclusa is an Advocate at Zarraluqui Abogados de Familia in Madrid . Reproduced with permission from STEP, The Society for Trust and Estate Practitioners, wwwstepjournal.org
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