By Sam Longworth Partner at Stewarts Law LLP
London continues to attract a huge level of wealth. It has a fantastic ability to reinvent itself, generation after generation. Emerging wealth centres are attracted by its property, education, the City and the financial sophistication of its advisors, coupled with the culture, history and myriad of other desirable factors which London and England offer. It is also known for being one of the most generous jurisdictions in the world for financial provision on divorce.
Can the financial exposure be managed?
Over the past 15 years, there has been a progressive movement of the English courts in favour of upholding formal agreements that a couple reach, setting out the financial consequences which would flow from a future divorce. These agreements take the form of pre-nuptial agreements (entered into before the couple marry); post-nuptial agreements (entered into at some point after the couples marry – not necessarily in the context of a separation); and separation agreements (entered into at the end of a relationship or in contemplation of a separation, where a divorce is not contemplated at that point for whatever reason).
What does a pre/post-nup cover?
At their heart, they look to regulate what the financial consequences of a divorce at some future point would look like – in broad or narrow terms. They can be very specific in terms of the types of assets included (say joint assets brought into the marriage or assets bought with the income of one party during the marriage) or excluded (say assets brought into the marriage, inherited assets, business assets, or any trust interests acquired during the marriage).
If one party comes into the marriage with, or the likelihood of obtaining, sizable wealth, which is unlikely to be matched by the other party, this can be considered in the scope of financial provision. For instance, a house of a certain size/type in a certain area can be passed to the other party for them to live in, for their lifetime or for the minorities of any children of the marriage.
Are they binding?
Following the decision of the Supreme Court in 2010 in Granatino v Radmacher, and case law which has followed it, the position is clear. The advice to clients entering into a pre-nup is that you are very likely to be held to its terms and should not be entering into it if you do not wish to be bound.
Effectively, if a party freely enters into a nuptial agreement with a full understanding of its implications, they will be held to that agreement; unless the circumstances at the time of the marriage breakdown mean that it would be unfair to do so.
In terms of what ‘unfair’ is, the court will look at all circumstances of the case. Generally, the court will only move away from the pre-nup to rectify any existing shortfall. This would normally centre on a party’s needs being met. The interpretation of ‘needs’ is likely to be much more limited than that which would exist without the pre/post-nup.
For a pre-nuptial agreement to hold, you will need to make sure that there has been access to legal advice on both sides, and a reasonable level of disclosure (this can be limited to a broad statement as to the scale of the wealth if there is a hesitation or anxiety about full disclosure – which can be the case with inherited/generational wealth or in cases with very significant wealth).
The Law Commission has recently proposed the introduction of ‘Qualifying Nuptial Agreements’, which would create legally binding pre/post-nups so long as certain criteria are met. It remains to be seen if and when Parliament will chose to legislate in this area, and if so what the requirements of a Qualifying Nuptial Agreement will be, but it will undoubtedly further increase the number of couples who look to nuptial agreements to create certainty about the financial provision that will be made in the event of a future divorce.
What if there are a number of jurisdictions involved?
Depending on the location and heritage of the wealth, the parties and the country (or countries) in which they may make their home during the marriage, it can often be necessary to put into place mirror agreements in those other jurisdictions (if the links with those countries are particularly strong). Good pre-nup will always express that the parties wish to be bound by the terms they have agreed wherever they are based in the world at the time of any divorce.
Even without mirror agreements it is often necessary to ensure that the form of the pre/post nuptial agreement will be upheld in any other jurisdictions which are identified. This involves working closely with leading divorce lawyers in other jurisdictions. Having a strong and established network of contacts and a good level of experience of working with international cases essential is when deciding who to instruct.
Is there anything that cannot be dealt with in a pre/post nuptial agreement?
It is not possible to stop the court (or state) dealing with the financial claims of a parent in respect of their child or children. As such, a pre-nup cannot say that one party will not make any financial claims against the other for maintenance, educational costs, or in certain circumstances, housing. That is not to say the pre-nup cannot set out that one party intends to cover such costs (and even a suggested level of provision), but if that level proves too modest or inadequate, the court can and will intervene to ensure that the appropriate provision is made. Contrast that against the position of a spouse in respect of their claims for themselves – unless the pre-nup sees them left in a position which is manifestly unfair, the court is not likely to interfere and will hold them to the bargain they struck.
Who should be thinking about pre/post-nups (and when)?
Whilst there is no longer a set time before the marriage that a pre-nup has to be signed (formerly 21 days), the reality is that you should look to have it wrapped up a good few weeks before the marriage. You do not wish to subject the happy couple to an unwanted additional layer of stress and strain at a time when they have enough on their plates!
The process can be completed very quickly, but it is usually 4-6 weeks from the first point of contact with a lawyer. Personally, I think the earlier the better. If possible you should give yourselves at least 3-4 months from the first conversation with a lawyer to the date of the wedding.
With a post-nup, the ‘when’ is often either in contemplation of a wealth event (i.e. as part of wealth planning, or generational wealth planning) or following difficulties in the marriage and reconciliation. You also have situations where a ‘pre-nup’ is proposed far too close to the wedding to be possible, so the parties enter into the agreement shortly after they marry. It is then a ‘post-nup’ simply by virtue of it happening after the nuptials!
In terms of ‘who’ should be thinking about this, it is:
- The couple themselves (especially the individual with wealth or potential to earn/create/inherit wealth during the marriage)
- The couples’ parents
- The advisors of the couple or parents (lawyers/accountants/bankers/financial advisors/family offices)
- Trustees of any structures to which the couple may have a direct or indirect interest in either now or at some future point.
Often, it is not the couple themselves who suggest a pre/post-nup but their parents or an advisor. This is often the best way to get around the ‘unromantic’ notion of a pre/post-nup. The idea that the pre/post nup is a requirement of the parents/trust in order for them to pass assets or income to one of the spouses moving forward can be seen as an appropriate level of caution to be applied. Such pre/post-nups are incredibly useful documents put into place at a time when it would have been difficult for one of the parties themselves to raise it with their spouse. Their recognition by the courts confirms the important and rational reference point they create in the event that unfortunate circumstances later arise after marriage.