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Prenuptial agreements

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Prenuptial Agreements

What are they ?

A prenuptial agreement is a written contract made between a couple engaged to be married, which sets out how their assets would be distributed between them should they ever get divorced.

Why have a prenuptial agreement ?

Whilst to some the thought of making such an agreement would indicate a lack of commitment to each other, for others there are legitimate reasons for wanting to put in writing their wishes of what should happen to their assets in the event of a divorce. Such reasons include:

  • Under the current Court system, particularly in cases of wealthy parties, the Judge in a Financial Settlement case will start off with an assumption of a 50:50 split of all property and assets. This can be a very unfair result, particularly when one party to the marriage is considerably wealthier than the other and the marriage was of a reasonable short duration. By having a properly executed prenuptial agreement, the parties can go a long way to try and redress any such potential unfairness in any Court imposed financial settlement.
  • Certain people can have inherited family wealth which has remained in the family for generations and they wish for this to be perpetuated. No member of the family wants to see such inheritance sold and divided simply to satisfy a Court imposed financial order. It can be either inheritance which they have already received, or inheritance which they have reasonable anticipation of receiving. By having a prenuptial agreement it can be possible to ring fence those assets to a degree with an expectation that such assets will be kept out of any eventual settlement on divorce.
  • The parties may have assets or property in other Countries which they wish not to be taken into account in any financial settlement. The Court will look at any assets wherever they are situated. The only way to redress this is by entering into a prenuptial agreement stating your wishes and expectations to exclude such assets from any settlement.
  • Each party may have dependent relatives or children from previous marriages of whom they want to protect their interests in the relevant party’s assets. Having such intentions set out in a prenuptial agreement will provide some ability to protect those children or dependents in any divorce settlement.

As everyone’s circumstances are different, any prenuptial agreement would need to be customised and drafted to the parties’ particular needs.

Are they legal and enforceable ?

It is a common misconception that in the UK prenuptial agreements are not legal or enforceable. The reality that these are two separate points and each needs to be dealt with in turn:

Legality of a Prenuptial Agreement

Prenuptial Agreements are legal agreements between the two parties. Such an agreement would need to be properly drafted, just like any other legal contract. In addition there are several legal pitfalls specific to prenuptial agreements which could invalidate its legality. These include:

 a)            Lack of independent legal advice – If it can be shown that one of the parties to the agreement did not get proper independent legal advice before signing the agreement, then it is likely that the agreement will not be considered legally binding. This will especially be the case where that person has been prejudiced under the agreement. Normally the Court will insist that each party has been independently represented by a solicitor with experience of advising on and drawing up prenuptial agreements.

b)            Lack of disclosure – If it can be shown that one of the parties had failed to disclose the extent of their financial assets at the time of entering into the prenuptial agreement, then it allows for the validity of such an agreement to be challenged. The best way of avoiding this problem is to identify the assets in a schedule attached to the agreement.

c)            Duress – If either party has undue pressure placed on them, then it is likely the Court will consider the agreement to be invalid.

Enforceability of a Prenuptial Agreement

Unlike the common belief, prenuptial agreements are enforceable, provided that they are properly entered into and there is no reason preventing the Court from agreeing to the provisions set out in it.

The way the Court system works in the UK in relation to financial settlements is that the Court will take into account specific criteria as set out in s.25 of the Matrimonial Causes Act (MCA) 1973. The purpose of this is that it looks to achieve what it sees as a just and fair result in the financial settlement. This power allows the Court full discretion to divide the assets as they see fit. Any prenuptial agreement can be ignored by the Courts should they see it as resulting in a manifestly unfair and unjust result.

Whilst this would seem to negate the power and purpose of any prenuptial agreement, the Courts have been increasingly disposed to adopt provisions of prenuptial agreements and they will enforce it where they believe that it is equitable to do so.

In a more recent change the Courts now seem willing to allow the result that would have been imposed by following the s.25 principles to be modified considerably by the provisions stated in the parties’ prenuptial agreement. This is as long as the requirements for a prenuptial agreement have been complied with and that giving effect to the provisions of the agreement does not unfairly prejudice the parties or any child of the marriage, or in any other way create an unfair result.

This change was seen in the recent case of Radmacher –v- Granatino [2009] where the Court of Appeal enforced the provisions of a prenuptial agreement and the three Judges in the case forcefully expressed the view that the parties should be free to make such agreements. This case subsequently went to the Supreme Court where they upheld the Court of Appeal’s decision.

However, it should be noted that in this case what the husband was expected to receive under the provisions still amounted to millions of pounds and so in these circumstances it is relatively easy to adhere to the agreement’s provisions whilst providing for reasonable needs as required under s.25 MCA 1973. More often than not there is not as much capital to be split between the parties and it is yet to be made clear how the Courts will act in such situations and whether they will enforce a prenuptial agreement in its entirety in such a case. It is more likely that whilst great weight will be placed on the fact that there is such an agreement, its effect will be simply to move any ‘reasonable award’ considered the Court to the lower end of the scale, rather than to have the Court simply enforcing the agreement itself.

This article from Shmuel Portnoy of Darlingtons Solicitors, who offer specialist family law advice in London.

Divorce – too expensive at the moment ?

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Divorce – too expensive ?

A recent survey from an unusual source suggests that divorce numbers are down simply because people can’t afford to divorce, so find alternative ways to cope. In a survey from the website Illicit encounters, a large number (some 31,000) of it’s members provided the following information :-

  • 38% state that the stress of selling their home is preventing them divorcing
  • 42% say they aren’t getting divorced as it’s too expensive.

Average legal fees for divorce are in the region of £13,000.00.

trusts

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Creating a trust: overview

Consideration is needed on the following preliminary issues :-

  • Who is the settlor?
  • What type of trust is needed?
  • Who does the settlor want as trustee
  • Who are the beneficiaries?
  • What are the trust assets?
  • Who will administer the trust?
  • How will the trust’s running costs be funded?

 

Even if the trust itself is not attacked, the trust assets may be treated as if still they belonged to the settlor if:

  • The settlor or his close family members can benefit from the trust (see Who are the beneficiaries?).
  • The settlor gives away assets to avoid paying care fees.

What type of trust is needed?

Tax issues

The type of trust determines what tax is payable when the settlor creates the trust and during the lifetime of the trust. The taxes most likely to apply are:

  • IHT. Almost all new lifetime settlements are relevant property trusts subject to a special IHT regime, with charges:
  • when the trust is created;
  • on ten-year anniversaries of creation; and
  • when assets are distributed from the trust.

 

The only exceptions are lifetime trusts that qualify as a disabled person’s interest  which are generally taxed as if the disabled person owned the trust assets personally.

A trust created by will, on the other hand, may also qualify as one of the following:

  • an immediate post-death interest, which is an interest in possession  (IIP) trust where the capital is treated as if it belonged to the life tenant
  • a trust for bereaved minors, which is a trust for children at 18, with favourable IHT treatment; or
  • an 18 to 25 trust, which is a trust for children at 25, with favourable IHT treatment until the children reach 18 and a modified version of the relevant property regime after that time.

Capital gains tax (CGT). Relevant property trusts qualify for hold-over relief

  • on creation (unless they are settlor-interested, see Practice note, Taxation of UK trusts: overview: CGT: no hold-over for gifts to settlor-interested trusts ; and
  • when assets are distributed from the trust.

Income tax. IIP trusts are taxed on the basis that the life tenant is entitled to the income personally. Non-IIP trusts are subject to special trust rates of tax. There is no difference between trusts created by a settlor during his lifetime and trusts created by will.

Special rules apply if the settlor or his close family members can benefit from the trust (see Who are the beneficiaries?).

Whether the trustees will be family members, professional advisers or a trust company. If there are professional trustees, there must be a clause in the trust document allowing them to charge for their services and they should provide the settlor with details of their charging rates.

  • How many trustees there will be. The usual number is two to four, because this falls within statutory rules affecting the number of trustees.
  • Whether the trustees must act unanimously, or can make decisions by majority. (They can only act by majority if the trust document allows them to do so.)

 

What are the trust assets ?

You need to know what the trust assets will be, so that you can:

  • Advise on whether tax will arise when the settlor gives the assets to the trust, for example, IHT on creating a relevant property trust. To do this, you need at least an estimated value for the assets.

 

Providing information to the trustees

The trustees need information about the trust so that they can fulfil their duties as trustees. The amount of information they need depends on the situation. For example, a sole corporate trustee, which is dealing with the trust administration, needs more information than an individual trustee where professional advisers carry out the trust administration.

 

All trustees should receive a copy of the trust document and any letter of wishes. Advisers will often have provided additional information to the trustees when dealing with the creation of the trust. Depending on the circumstances, however, the trustees may also need:

  • A family tree, particularly if any trustee does not know the family, or if there are beneficiaries from several different branches or generations.
  • A summary of the terms of the trust, particularly if the trustees have no legal knowledge.
  • A list of key dates (for example, when each grandchild reaches 18 and so obtains an IIP).
  • A summary of the tax treatment of the trust.
  • Information about the trust assets. For example, if a valuable property is the main trust asset, the trustee should know who occupies it and who is responsible for insuring and maintaining it.
  • Guidance on the role of a trustee, if they do not have experience of being a trustee.

The trustees should consider whether they need to meet regularly and, if so, at what intervals. This depends on whether the trust holds assets that need active management. For example, trustees of a large portfolio of commercial property will need to meet more often than trustees of a life insurance policy, who may not need to meet regularly unless something changes. The trust administrator should prepare agendas for the meetings and record decisions taken.

The trust administrators should:

  • Arrange for the original trust document and any other original documents (such as a letter of wishes) to be stored safely.
  • Consider keeping a copy of key attendance notes and written advice to the settlor about creating the trust (and about trustee exemption clauses) with the trust document, if the correspondence file is likely to be destroyed after a few years.
  • Keep copies of original documents on working files for easy access.
  • Set up reminders in advance of key dates, including when beneficiaries become entitled to income or capital (for example, on reaching 18), ten-year anniversary charges in relevant property, when the accumulation period ends (if there is one, Statutory restrictions on accumulation are abolished for new non-charitable trusts; and when the perpetuity period ends, if a fixed period.
  • Establish a system for recording information needed for the trust accounts and tax returns (such as income and expenses).
  • Record decisions taken by the trustees when they begin to act (for example, decisions to appoint advisers).

 

Trust points to deal with

  • Allowing professional trustees to charge for their services. Even if there are no professional trustees, it is good practice to include a charging clause in case it is needed in future. It may cause practical difficulties if, for example, a family trustee dies unexpectedly and a professional cannot act.
  • Allowing trustees to be paid for acting as an officer or employee of a company whose shares are trust assets.
  • Limiting the liability of trustees, if there are non-professional trustees.
  • Allowing trustees to buy and sell assets from the trust, if family members are (or may become) trustees.
  • Allowing trustees to benefit one of their number, if a beneficiary is (or may become) a trustee.
  • Allowing trustees to act by majority, if the settlor wants this.