A nuptial agreement can be a useful tool for wealthy individuals and families who seek to preserve wealth for future generations. Here, Joanne Edwards, Head of Family Law at Forsters shares her insights.
The Risks
Wealth protection strategies are devised to reduce the risk of wealth being dissipated or lost, and to mitigate any risks that can be identified. For example, the risk of currency fluctuation can be mitigated by hedging, the risk of losing key personnel can be mitigated by life insurance, and the risk of incurring unnecessary tax can be reduced by careful structuring.
Divorce can pose a significant risk to a family or individual’s wealth. Recent publicity suggests that Amazon founder Jeff Bezos will pay his wife MacKenzie Bezos in the region of $35 billion, following the breakdown of their 25-year marriage. Multi-million pound divorce settlements are far from uncommon in England: not for nothing is London referred to as the “divorce capital of the world”.
For a family seeking to ensure that wealth is preserved for future generations, a divorce can be hugely expensive and disruptive. The emotional toll on all concerned is well-known. Legal fees can be significant. The cost of the settlement can significantly deplete the family finances. But there are other, hidden, costs: a protracted divorce can lead to business paralysis. Injunctions may be granted, severely curtailing business operations. Trusts, family businesses and trusted advisers may be required to disclose documents or even joined as parties to the proceedings. The most hard-fought divorce cases may last for two or three years, causing significant disruption.
The Role Of Nuptial Agreements
A nuptial agreement can reduce or mitigate these risks.
A common perception of nuptial agreements is that they are designed to limit the extent of one party’s financial claims. Whilst they can be used in that way, their greater utility in this context is their ability to reduce uncertainty, and therefore risk.
Jurisdiction
Wealthy families are increasingly mobile, and many will have connections with several countries. A great deal of thought may have been given to where individual family members reside, where they are domiciled, and where assets and structures are located.
The rules regarding jurisdiction for divorce are complex, and vary from country to country. It is highly likely, however, that a party seeking a divorce will have a choice of jurisdictions, and that choice can hugely affect the size of the likely award, as well as the likelihood that payment of any sums due under the award can be enforced. The practice of “shopping” for the most favourable jurisdiction is well established, and can lead to protracted litigation in multiple jurisdictions.
A nuptial agreement can fix jurisdiction in one state. Alternatively, it can be drafted so as to be effective in each state that may have jurisdiction. A well-drafted nuptial agreement can significantly reduce the risk of jurisdiction shopping.
Asset Definition
A nuptial agreement will typically define which assets form part of each party’s separate property, and which constitute joint property. The agreement will then establish rules for how the different classes of assets are to be divided in the event of divorce. The rules may be very broad, or very detailed.
A well-drafted nuptial agreement can provide certainty about the extent of the parties’ assets, and how they are to be divided in the event of divorce.
Wealth Preservation
A nuptial agreement can ensure that fair provision is made for the economically weaker party on divorce, whilst nonetheless preserving family wealth for future generations. For instance, a home can be settled subject to a life interest, rather than by outright transfer, or a separate structure can be established from which maintenance is paid during the recipient’s lifetime, with the structure later reverting to family ownership.
Predictable Outcome
A nuptial agreement should provide a couple, and their wider families, with certainty about the financial consequences of divorce.
A nuptial agreement is likely to be upheld by the English court, provided both parties had disclosure of the other’s wealth, and had independent legal advice about the consequences of entering into the agreement. The agreement must also make fair provision for the economically weaker party, and neither party must feel unduly pressurised to sign the agreement.
Provided those criteria are met, the parties can be reasonably certain that the agreement will be upheld. This greatly reduces the likelihood of costly and time-consuming and expensive litigation, if the marriage does break down.
Existing Structures
A nuptial agreement should be drafted with existing asset structures in mind. For instance, the agreement should set out the mechanism whereby trustees are to be requested to assist in the event of divorce.
Equally important is that existing structures are “stress-tested” to ensure they are sufficiently robust if they are challenged in the event of divorce. As specialist family lawyers, we have extensive experience of the way in which the family courts approach complex structures, and will be able to advise what steps should be taken to reduce or mitigate risk.
Nuptial Agreements And Family Culture
Family dynamics can be complex. It is rarely easy for one family member to suggest to another that they should obtain a nuptial agreement. Trusted advisers have a key role in ensuring that nuptial agreements are discussed, and the advantages are understood.
Older generations can encourage future generations to enter into nuptial agreements by making it clear in letters of wishes that trustees are to look more favourably on those who have done so.
Similarly, family constitutions can be drafted so as to confirm an expectation that family members wishing to share in the family wealth are expected to enter into nuptial agreements.
Nuptial agreements are an essential tool for wealth planning.
About the Author - Jo is the Head of Family Law at Forsters and specialises in dealing with issues which arise on relationship breakdown, including the financial consequences of divorce or separation; and resolving arrangements for children, including cases involving relocation with children. She also has expertise in advising on pre-nuptial agreements and acting in cases involving unmarried couples. Although Jo has extensive experience of taking cases to court where required, she is known for her conciliatory, pragmatic approach and desire to settle cases where possible.
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