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Pre-nups and downs

fter Radmacher v Granatino what protection do pre-nuptial agreements have for family wealth?

Further clarification of the status of pre-nuptial agreements within the legal system of England and Wales was given by the Supreme Court in the recent case of Radmacher v Granatino. However, families should also give consideration to other ways to protect wealth.

In the Radmacher case, the husband, a French national, and the wife, a German national, were married in England in 1998. They entered into a pre-nuptial agreement in Germany stipulating that neither party would benefit from the property of the other either during the marriage or on its termination. In 2008, divorce proceedings were commenced in London, at which time the wife was worth an estimated £100m.

In its judgment last month, The Supreme Court stated: “The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.’

The court decided that unfairness will “necessarily depend on the facts of the particular case”. However, pre-nuptial agreements cannot be allowed to prejudice the reasonable requirements of any children of the family.
The longer a marriage lasts the more likely a pre-nuptial agre
ement will be found to be unfair as unforeseen circumstances will probably have arisen. The court made it clear it is still the court, and not any prior agreement between the parties, that will determine the appropriate ancillary relief on divorce. In recent years, pre-nuptial agreements have become commonplace in England and Wales and are generally used by wealthy individuals in an attempt to protect their family or independent wealth against financial orders on divorce.

Under English law, there is no provision to render a pre-nuptial agreement enforce-able. Under section 25 of the Matrimonial Causes Act 1973 the court is to “have regard to all the circumstances of the case…”
An agreement would only be one of the factors the court would use to determine division of the finances on divorce.

For a pre-nuptial agreement to be seriously considered, the parties should give full and frank disclosure of assets and property before the agreement is made, understand the effect of the agreement and seek independent legal advice.

The agreement must not limit provision for any children of the family. There must be no pressure to sign the agreement hence it should be entered into well in advance of the wedding day, in excess of 21 days.

Despite the Radmacher ruling, the statutory basis for pre-nuptial agreements remains unchanged and there is no sign of any imminent legislative change. At present, a pre-nuptial agreement cannot guarantee clarity on marital breakdown or avoid expensive litigation.

Families should consider the use of trusts as a more secure way to protect assets from future divorce.

Parents can gift assets to trusts rather than to their children outright or they can leave their assets to a trust for their children’s benefit under the terms of their wills.

It is also possible to settle personal wealth on trust.

Advice should be taken well in advance of a marriage to increase the prospect of the trust not being brought into the equation. It must be properly drafted and administered to have any chance of successfully protecting assets.

If it is genuinely at the trustees’ discretion as to how a beneficiary benefits it will be very difficult for the court to place a value on this during ancillary relief proceedings in a divorce.

The court can class a trust as a financial resource. It will take into consideration the value of the trust to a beneficiary if it is a sham. If it looks as if a beneficiary can demand money from the trustees and the trustees are willing pay out, the court is much more likely to include the trust as a financial resource.

The trustees should try not to regularly distribute funds to a beneficiary from the trust and should consider lending funds to beneficiaries rather than giving them outright.

The court has the power to vary trust provisions if the trust is a marriage settlement. It will consider whether there was a nuptial element to setting up the trust. It will also look at the terms of the trust itself and the trust assets to determine the true nature. This is why it is better to act well in advance of marriage.

Trusts cannot be used to protect personal wealth if the funds are paid in shortly before a separation.

The court will look behind the circumstances and almost certainly determine deliberate deprivation of assets has occurred and will take the value of the trust into account.

It is also prudent to keep a record of all gifts and inheritances received prior to a marriage and as far as possible to keep them completely separate from the assets acquired during the marriage.

If at all possible, these funds should not be drawn upon to maintain the family so the court is less likely to include them in a financial settlement.

Lynsey Siveter is an associate in the trust, wills and probate department and Tim Whitney is an associate in the family department at Barlow Robbins LLP.

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