Last year, I commented on a leading case affecting financial settlements in divorces – White v White. At the time I noted that the implications of the judgement from the House of Lords threatened to change the complexion of these divorce settlements completely.
However, I warned that the courts might, especially where the couple's assets were not as great as those in the White case, continue to award the spouse with the lower level of assets and/or income only enough of the other spouse's wealth to ensure that he or she could be likely to enjoy a reasonable standard of living, as opposed to awarding that disadvantaged spouse a percentage – probably 50 per cent – of the spouses' combined assets.
I will, first of all, remind readers of the main facts of this case and then examine the reaction of solicitors and the courts to the White case. Finally, and perhaps most important for IFAs, I will identify and outline the ways in which all this will now affect clients who are heading towards, in the middle of, or recovering from, divorce proceedings.
First, the background. In October 2000 the House of Lords issued its judgement on the White v White divorce settlement.
It supported the decision of the Court of Appeal, left the two parties to the divorce nursing additional legal costs (just for the appeal to the Lords and therefore in addition to the huge costs they had already accrued up to that point) of more than £500,000. More important, it signalled a complete change in the basis by which divorce settlements are arrived at.
Mrs White, having been initially awarded by the court much less than 50 per cent of the combined total of the assets held by herself and her husband (most of these assets being in her husband's name) was not prepared to accept defeat. In fact, she had been awarded slightly less than £1m out of combined assets worth around £4.5m. She appealed, seeking half.
The Court of Appeal sympathised greatly with Mrs White's claim, deciding not least that it would be unfair to award Mrs White only enough of the joint assets to satisfy her “needs” while leaving Mr White not only sufficient capital to satisfy his needs but also the entire value of the surplus assets. It increased her award to around £1.7m.
This incensed Mr White, who had put forward the millionaire's defence as a major part of his submission to the court. He decided to appeal to the House of Lords (the ultimate court of appeal). But was Mrs White happy with the near doubling of her award? No. She also decided to appeal to the Lords.
Ground-breaking stuff, because Mrs White had already been partially successful in persuading the Court of Appeal that she, as a (financially) disadvantaged spouse, deserved an award greater than just enough money to enjoy a reasonable standard of living (as had thus far been the practice of the courts) – she deserved half of everything.
The House of Lords agreed with the Court of Appeal and supported the order for £1.7m – not half, but a much greater amount than expected under the traditional “reasonable needs” basis of settlement.
In fact, the Lords' judgement explained why there were individual circumstances why Mrs White's share was less than half and noted that, in future divorces, the idea of a straight split between the spouses should be a starting point. Fantastic news indeed for these disadvantaged spouses (mostly women) – if future courts followed the White judgement.
On the one hand, they should follow the White judgement (as it came from the highest court in the UK) but there was significant doubt as to whether they would, especially where there were far fewer assets to share.
So, what has actually happened since my last article?
Well, quite simply the main principles of the White judgement are now being applied to most new divorce settlements, even where those settlements relate to negotiations which have been going on for some months or even years. Without doubt, the day of the financially disadvantaged spouse has now arrived.
To illustrate the general consensus opinion within the legal profession over the last few months about certain unanswered aspects of the White judgement, we can glean a great deal from a consideration issued by the influential Solicitors Family Law Association, published earlier this year.
It has subsequently been supported by a number of leading legal commentators, thus adding to its weight among practising solicitors and, ultimately, the courts.
The three most important aspects of this guidance for financial planners to bear in mind when involved in giving advice to clients in divorce settlements are:
The importance of the White judgement is not limited to so-called big money cases. However, the principle of equality is likely to be most applicable in cases where there is sufficient capital or income or both to meet needs.
Equality may not be fair. Other factors may guide a different distribution, such as short-period marriages or the unreasonable behaviour of one of the parties.
The possibility of an outcome based on White principles should be specifically considered in the context of the courts' now available powers for sharing pensions.
This is a huge point for the SFLA to make. Not only can this paragraph be considered to infer the potentially vital part a pension-sharing order can play in helping to arrive at a White division of assets but perhaps the White case could be quoted to indicate a greater possibility of pension rights being properly taken into account in a bigger proportion of divorce settlements than has previously been the case.
Many unanswered questions remain, not least the way in which divorce lawyers – or ultimately the courts – will now attempt to balance the traditional method of trying to answer the reasonable needs of the disadvantaged spouse, but give that person very little (if any) greater share of the combined income and assets against the straight-split starting point (but not necessarily finishing point) encouraged by White. This will be especially interesting for low-value divorces.
The White decision and its aftermath have come, of course, at almost exactly the same time as the introduction of the availability of pension-sharing orders as a new remedy. The two developments look destined to become intertwined in the way that future divorce settlements are determined.
IFAs now have a major part to play not only in the pension-sharing procedure and solution (often pension transfers) but also in other areas also.
A number of IFAs are now specialising in this field of financial planning. The White judgement will drive demand for more advice relating to investments awarded to a spouse and the division of the value of pension rights (especially pension sharing), to name just two areas.
As regards family businesses, the White judgement will result in many family businesses having dramatic changes in shareholding as a result of divorce settlements, and this will have an impact on business financial planning already undertaken (keyperson, share purchase arrangements, etc.) or about to be undertaken.
Many more areas now need to be considered more carefully in the light of the White judgement and the way the legal profession and the courts are starting to apply its principles, in one way or another, in the majority of subsequent divorce cases.