Wealth protection on marriage and divorce

A nuptial agreement, either a pre-nuptial agreement or a post nuptial agreement, can be entered into by the parties to a marriage to set out what will happen in the event of a divorce. There are many obvious advantages, such as to protect pre-acquired assets and to establish certainty, insofar as it is possible, in the event of divorce. Of course agreeing such matters when both parties are on the same page usually reduces legal costs and acrimony if the marriage does not survive.

Nuptial agreements are not automatically binding, though it is fairly well accepted that as long as the result of the agreement is fair, that certain conditions are met in terms of timing and adequate disclosure and that there is no mistake, misrepresentation, duress or undue influence, the agreement should be upheld by the court. It is however imperative that such agreements are drafted with extreme care and that all the conditions set down are met to ensure that there is the greatest chance possible of the agreement being upheld. Expert legal advice is invaluable and it may well be that this will need to be cross-jurisdictional if there are assets held outside of England & Wales.

Trusts can be established to serve a variety of purposes, such as wealth planning, tax reasons and protection of family wealth. The creation of a trust essentially transfers the assets from the owner of the asset(s) to the trust and can be very useful in terms of wealth protection. There are various types of trusts and specialist advice is essential at the outset.

It is vital to ascertain at the start of divorce proceedings what, if any, measures have been put in place to protect family wealth; whether it is a nuptial agreement or a trust. However, the court has wide ranging powers and the existence of a nuptial agreement or a trust does not mean that the assets purportedly protected by those agreements or trusts are safe in the context of matrimonial financial remedies, particularly if there is foul play at hand.

In relation to trusts, it may be for example that a settlor spouse may have established the trust to defeat or frustrate the other spouse’s claims on divorce. This could give rise to allegations that the settlor spouse has dissipated assets, depending on the timing of the creation of the trust. If the court agrees that this is the case, it may be that the trust is declared invalid and the assets placed in the trust are available for sharing in the financial settlement.

Even in the normal course of events, the settlor of a trust will need to consider the potential implications if the beneficiary were to divorce. The other spouse may argue that the trust is a financial resource available for sharing.

If assets are transferred to a trust during the course of your marriage it is likely to be considered to be a “nuptial settlement” which the court could vary. If the trust was created before your marriage then the court’s approach will depend on the history of the trust. A detailed analysis of the trust documentation will be required.  However, it may still be capable of variation if you or your spouse is a beneficiary.

If the court is satisfied that trust assets are a resource available to either party to a divorce and it deems it necessary to do so the court can either make an order varying the trust or a “judicious encouragement” order. If the trusts are governed by offshore law then enforceability may become an issue and it may be considered more practical to satisfy any award first with the assets held in England & Wales.

It is important to be full and frank in your disclosure of all assets, to include trust assets. You may be asked to provide further documentation relating to the trust in due course and it is also possible that the trustees may be joined to the proceedings so proceed with caution.

The court will consider amongst other things, whether the trust is a financial resource available to the spouse, whether the trust is a nuptial trust capable of variation by the court and whether the trust is valid or what is known as a sham trust.

As per Waite LJ in Thomas v Thomas,

“The discretionary powers inferred on the court by s23-25A of the Matrimonial Causes Act 1973 to redistribute the assets of spouses is almost limitless.”

In this leading case, judicious encouragement was considered and on appeal a robust approach was taken with the view that the husband would be able to meet any deficiency in his income by changing company policy and paying him more. The capital award to the wife however did not exceed the capital held in the absolute ownership of the husband and so the court was satisfied that the husband could meet the award without the assistance of third parties, although he himself would need assistance.

In the case of Charman v Charman, given the nature of the facts in that the letter of wishes provided that the trustees make the assets available to him and as such the assets were treated as already belonging to him. However, the trust assets were offset against the other matrimonial assets, giving the wife a larger share of those instead.

That said, such cases should be approached with extreme caution, particularly after the decision of Mr Justice Holman in the case of Daga v Bangur [2018] EWFC 91. In this case, the husband tried to make a case on needs in relation to two trusts of which the wife was one of the beneficiaries. However, he was unsuccessful in progressing his argument and in judgement the judge referred to the “overarching requirement” of the court, before relying on judicious encouragement, to be satisfied that that trustees would likely respond to the court’s encouragement and concluded that in this case they would not, relying on the letter of wishes of the wife, that the trustees should “act in accordance of her father’s advice”.

Holman J stated,

“This tragic and destructive case should stand as a cautionary tale to those who embark on expensive litigation which they can ill afford in the hope of prising money from a discretionary trust. A very careful and cool appraisal needs to be made at the very outset as to how realistic a prospect that really is.”

So whilst nuptial agreements and trusts both provide the opportunity for some degree of protection for the wealthier spouse, there is potentially scope for the nuptial agreement or the trust to be challenged. In relation to the latter, it is very important to remember the cautionary tale of Mr Justice Holman and to consider in serious detail  the previous distributions or funding that has been given and the history of the trust, to include all the relevant documentation.

It is therefore vital to obtain specialist legal advice at the earliest opportunity to ascertain how likely the agreement is to be upheld or the trust protected, or attacked, depending on whether it is your wealth or your spouse’s.

Grainne Fahy

Grainne Fahy, partner and head of family law for London and South East

If you are facing similar issues or would like some advice, click here to speak to a member of BLM’s family law team.

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