Protecting family wealth as divorce rates rise
With reports that divorce enquiries are up over 40 per cent during lockdown*, interest in protecting wealth through pre- and post-nuptial agreements is on the rise. We look at the potential benefits of these agreements and what you need to consider.
In the UK, the division of assets on divorce doesn't follow a set formula, with the family court taking a range of issues and circumstances into consideration. "That creates uncertainty," says Karina Challons, Managing Director, Wealth Planning Private Banking, "and perhaps accounts for the increasing importance placed on both pre- and post-nuptial agreements by high net worth families. Even though the agreements are not legally binding in the UK, they can still prove to be influential in court, providing all parties have been properly advised and the correct process has been followed."
Replacing emotion with rationality
That means, for example, ensuring that any pre-nuptial agreement is arranged and signed at least 28 days before the wedding is due to take place, so that no suggestion of it being signed under duress can be made. In practice, says Karina, the issue should be raised much earlier.
"Discussions around pre- and post-nuptial agreements should form part of a child's education as they enter their late teens. By making them financially aware of such agreements as part of their overall responsibility to protect the family wealth, they become something that's accepted as the family norm. It also helps to take the emotion out of the equation. Having this discussion with children before they bring a potential spouse home is far less personal."
"These shouldn't be viewed as one-time agreements that can sit quietly on a shelf – they must be reviewed to ensure they continue to offer the protection the family requires." Karina Challons, Managing Director, Private Bank Wealth Planning, HSBC
"Pre- and post-nuptial agreements can provide peace of mind and security." Karina Challons, Managing Director, Private Bank Wealth Planning, HSBC
When it comes to starting the process, it's essential to have all necessary documentation to hand so your advisers can build a thorough up-to-date picture of current and potential future wealth. That should include details of all assets held, as well as income and expenditure and any possible future inheritances or pension provision. It may also include details of any dowry, an important aspect of many international unions. "We're increasingly seeing these forms of agreements being dictated from beyond the grave," explains Karina. "A letter of wishes outlining the steps trustees should take to safeguard the family wealth and to help ensure assets remain within the family is becoming more common."
Post- as well as pre-nuptial agreement
That may include a legal agreement that ensures that if a couple decide to cohabit before marriage, the third party has no rights to any property that forms part of the estate. This is also where post-nuptial agreements can prove useful. "If during the course of the marriage, one of the parties receives substantial gifts from family members, or an unexpected inheritance that wasn't covered by the pre-nuptial agreement, it's advisable to have a post-nuptial agreement drawn up that both parties enter into," says Karina. "In some cases, that may mean having several post-nuptial agreements created as different events occur."
Post-nuptial agreements can also help ensure the original pre-nuptial agreement is influential, particularly if personal circumstances change. "That's why it's vital to keep your advisers up to date," says Karina. "These shouldn't be viewed as one-time agreements that can sit quietly on a shelf – they must be reviewed to ensure they continue to offer the protection they were originally intended to provide."
Benefits for both parties
Other areas to consider when creating pre- and post-nuptial agreements are residency and the location of assets, which may require agreements to reflect different jurisdictional law. Divorce court proceedings will also take into account the reasonableness of any terms agreed to, whether any undue advantage has been obtained or full disclosure not provided, as well as the financial needs of both parties and their future requirements.
Although the primary motivation of most families or individuals entering into a pre- or post-nuptial agreement is to protect wealth, it offers benefits for both the wealthy and less wealthy party. "The agreements must ensure there is reasonable provision to meet the needs of the less wealthy individual," says Karina. "Some will also take into account the length of the marriage and whether there are any children and, of course, any wealth you build together as a couple will not be covered by the pre-nuptial agreement.
"Taking independent legal advice from their own lawyers is important to ensure there's a full understanding of the terms of the agreement and that they're not jeopardising their future. However, for the less wealthy party, pre and post-nuptial agreements can provide peace of mind and security that they will be provided for and it also means that they enter into the marriage with their eyes open."
If you would like to discuss ways to protect your family wealth now and in the future, contact your Wealth Manager or Investment Counsellor.