A protecting species

Lawyers and other professional advisers often recommend the use of trusts or family investment companies (FICs) as a means of ensuring that wealth is passed through the generations in a tax-efficient and controlled manner. 

One consideration that should always be given careful thought in any form of wealth planning is the impact of divorce on the flow of wealth through a family. Individuals are often keen to ensure that wealth does not disappear from the family as a result of a financial award at the time of a divorce. This raises the question of what steps could and should a family take to prevent the loss of family money in a divorce.  

Many clients of mine have mistakenly formed the view that the mere fact that assets have been placed into a trust or FIC protects them from any risk that they could be lost or impact the division of assets in a divorce. Unfortunately, that is not necessarily the case, and I would therefore always recommend that as a ‘belt and braces’ approach, families should consider the need to enter into a prenuptial agreement (or postnuptial agreement if the couple are already married) in addition to any wealth planning, such as the creation of a FIC.

The risks without a prenuptial (or postnuptial) agreement in place

Judges in the Family Court may take into account the assets held in a trust and will consider the ‘reality’ of the situation. Therefore, even assets held in discretionary trusts could be considered by a family court at the time of a divorce. This could lead to one spouse being given more of the ‘non-trust’ assets or an order being made for a lump-sum payment which can only be met with recourse to a trust. 

When assessing to what extent the trust should be taken into account, the court will look at the trust’s history. This includes the circumstances in which the trust came into existence and the intentions and likely actions of the trustees based on the evidence available. This is subject to the usual civil burden and standard of proof. The courts can, and have, made capital awards in circumstances where they know a spouse could only comply with the order with the assistance of the trust. 

To treat an interest in a discretionary trust as an asset for distribution in financial proceedings upon divorce, the court must conclude that the trustees “would be likely to advance the capital in the trust to the spouse immediately or in the foreseeable future” (Charman v Charman [2007] EWCA Civ 503). The question of what period of time is “foreseeable” will be dependent on the circumstances of the case. In the past, a time period of anywhere from two years in some cases, to 15 years in others, has been sufficient.  

Where a party is found to have an interest in a discretionary trust that is likely to result in them receiving a direct benefit from the trust on their request to the trustees, the court may consider it fair for the other party to have more (or all) of the non-trust assets.  

The distinction between determining what the trustees will actually do and encouraging them to do a certain thing is almost inevitably blurred, because both the court and the trustees are engaged in a similar process of determining what is reasonable based on the same facts. However, as Lord Justice Moylan explained in RK v RK [2011] EWHC 3910 (Fam) in relation to a husband who was the discretionary beneficiary of a number of trusts: “The court will expect trustees to respond positively if the court concludes that the interests of the trust and of the other beneficiaries would not be appreciably damaged if the trustees were to provide the husband with the resources he requires to enable him to make proper financial provision for his wife and children. They would be expected to respond positively because the court would have concluded that the husband would be making a reasonable request and trustees are expected to act reasonably in the discharge of their duties.”  

It is clear that a trust alone cannot necessarily protect assets from being considered by the court at the time of a divorce. So, what are the additional options to consider? 

Prenuptial and postnuptial agreements 

A prenuptial agreement is an agreement entered into by a couple who intend to marry or enter a civil partnership. A postnuptial agreement will be entered into by a couple who are already married.  

These agreements have gained popularity and momentum in England and Wales. Anecdotally, I can say that they remained rare when I started my career in family law some 15 years ago. However, they now make up approximately 40% of my workload at any one time.  

While not legally binding, the landmark case of Radmacher v Granatino [2010] UKSC 42 established that prenuptial agreements are to be given effect in England and Wales, provided that they have been entered into by both parties freely, with a full appreciation of the implications and, in the circumstances, it is not unfair to hold the couple to their agreement.  

A prenuptial or postnuptial agreement will record the respective and mutually agreed intentions of the couple should their relationship end, on the basis of what they believe to be a fair division of assets and finances. They can be specific in relation to any trust, FIC or inheritance and state that these should be considered ‘non-matrimonial’ property and be entirely excluded from consideration at the time of any future divorce.  

To ensure the validity of a nuptial agreement, it is good practice for both parties to exchange full and frank financial disclosure and seek legal advice on the implications of the agreement in advance of signing the document. Only when both parties are content with the agreement should it be signed (at least 28 days before the wedding or civil partnership is recommended).  

It has been over 10 years since Radmacher, and the courts of England and Wales remain firm in their stance that prenuptial agreements should be upheld where entered into correctly. 

In WW v HW [2015] EWHC 1844 (Fam) the husband brought a claim for financial provision against his wife, despite having agreed not to in a prenuptial agreement. Notably, the wife had inherited wealth of approximately £27m before the marriage. The court ultimately held that both parties had entered into the nuptial agreement freely and the husband had every opportunity to seek further advice about the agreement; his understanding of the consequences of signing the agreement was found to be sufficient. Ultimately, the court gave significant weight to the agreement. 

It is also important to note that nuptial agreements may be considered by the court as a relevant factor when considering claims under the Inheritance (Provision for Family and Dependants) Act 1975.  

While nuptial agreements are not legally binding in England and Wales, they will be given weight by a court and are highly persuasive, provided that they have been entered into freely and in accordance with the good practice outlined above. For couples with significant pre-marital family wealth, or for those who expect to receive assets during their marriage, they should consider entering into an agreement to protect family wealth. Nuptial agreements are a crucial element of sensible financial planning and wealth protection.