Bridge over troubled waters: prenups

Individuals have to accept that if they marry, there is a one in three chance it will end in divorce. Looking at this statistic, it is surprising that a considerable proportion of individuals do not plan for, or take steps to mitigate, the financial consequences of divorce.

Some may be surprised when I say that it is often advisers close to an individual who should be considering prenuptial agreements, rather than the individuals themselves.

Accountants, banks and private client practitioners are all individuals/institutions to whom someone looks to protect their wealth. A prenuptial agreement is there to do exactly this.

Popular misconceptions

A prenuptial agreement is made between two parties prior to marriage, which details how their individual and joint assets are held by them during the marriage and prescribes what should happen in the event of a future relationship breakdown and divorce.

There are two popular misconceptions among family lawyers about prenups:

• that they are only for the rich and famous; and

• there is no point, as they are not legally binding.

Upon the premise such agreements are there to protect the wealth of one or both of the parties, they are useful when wealth has been accumulated prior to marriage. For example, for:

• couples marrying later in life for the first time, who have accumulated wealth, property and investments prior to the marriage, which they wish to protect;

• second marriages, where the parties have received a settlement from their first divorce and they wish to preserve those assets for themselves, or for the children of the first marriage;

• a beneficiary of a bare or discretionary trust;

• a party who owns or has a trust in a family business and wishes to retain control in the future if the relationship breaks down.

However, prenups are not just concerned with pre-marital wealth. They can be equally appropriate where wealth is accumulated post marriage, such as for future anticipated inheritances.

Prenuptial agreements are not yet legally binding in this jurisdiction. However, the Law Commission is currently considering their status and is due to report on its proposals for reform in 2013.

It is not unrealistic to expect that, with reference to other countries in Europe, England will follow suit and they will be legally binding shortly.

Careful consideration

But what is the position at this point?

Family practitioners are aware of the 2010 case of Radmacher v Granatino [2009] EWCA Civ 649. The guidance from this can be no clearer than the following words in the judgment: “The court should give effect to a nuptial agreement that is entered into freely 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.”

With these comments in mind, no individual should enter into a prenuptial agreement unless they expect to be bound to it in the future.

Equally, an individual wishing to protect their wealth should feel reassured that, subject to certain criteria being fulfilled, unless there are particular circumstances that dictate otherwise, the agreement which they have signed to secure protection should be upheld by the court.

Consequently, in the last two to three years, there has been a considerable increase in parties entering into prenuptial agreements to protect their wealth. As a full-time family practitioner, both myself and my colleagues will generally have at least one or two prenuptial agreements as part of our caseload at all times.

General matters for consideration surround individual wealth, joint wealth, inheritance issues, income needs, and the future position should children be born into the marriage.

Joint property should be considered carefully. This often involves the matrimonial home. For example, if one party has made a higher contribution to the purchase price or substantial renovations, is this reflected in ownership, with the parties holding the property as tenants in common?

Should a separate declaration of trust be prepared confirming the position? If that property is sold and a subsequent home is purchased, is the beneficial interest from the previous property simply ‘rolled over’?

Should both parties make an equal contribution to the running costs of the home, repairs or improvements? Capital contributions made by one party causes one of the most common problems on divorce, with parties seeking to argue such monies were never part of the ‘matrimonial pot’.

Property pre-owned by one party is often retained by the party who has generated the wealth. These assets should be particularised in an appendix within the document, so there can be no argument that such assets should be excluded from the matrimonial asset base. Are there any assets from pre-acquired wealth that will become joint property in the future? If so, they should be clearly identified.

The income needs of the parties should be considered, not only at the time of the marriage, but in the future. For example, the proposed wife may ?be earning now, but be a housewife ?and mother in the future, when children are born.

How is this to be dealt with upon divorce, if ongoing financial support would then be required by the ?husband? The quantum and term of spousal (and child) maintenance must be carefully considered, with it documented on file why and how the particular provisions concerning this have been agreed.

This can often be useful when the divorcing wife, in the future, claims that she never accepted her income needs as detailed in the prenuptial agreement.

One party can often amass debts during the marriage, often without the knowledge of the other party. As such, a clause detailing the position concerning separate and joint debt is useful.

Regular review

Contents, while often one of the ?smallest ‘assets’ of the marriage, often creates a disproportionate amount of work upon a divorce. If there are sentimental or family items one party would wish to retain in the future, this should be recorded in the agreement.

Where future anticipated wealth is expected, consideration should be given to safeguarding such assets in the agreement. The circumstances of parties will change over time and, as such, it is important that a review clause is incorporated into the agreement, for example, every five years, or upon the birth of a child.

If the agreement is not reviewed, parties may wish to make it clear that ?the agreement will continue in its original form.

Finally, a common dispute can ?often arise as to the intentions of the parties. As such, one should not underestimate the importance of keeping full notes on your file, not only as to the discussions with your own client, but discussions that have taken place with the other party’s lawyer, that may explain the position in relation to particular clauses, should a dispute arise in the future.

I recently completed a prenuptial agreement where future periodical payments have been agreed between ?the parties. It has been fully documented in a lengthy attendance note (joint meeting between the parties and their legal representatives) as to how and why the quantum and term ?of periodical payments has been reached.

This will negate the possibility of the wife challenging the position ?in the future should the relationship break down.

As with any insurance policy, it is hoped a prenuptial agreement will sit in a drawer gathering dust, never to be used. However, if a separation and divorce subsequently arises, the individual with such an agreement (regardless of how much wealth exists) is likely to take a view that this was one insurance policy well worth having.