Last weekend, outside our offices on Parker’s Piece, was the Cambridge Food and Garden Produce show. This got us thinking. We were struck by the similarities between the investment of time and materials which go into gardening and its sometimes unpredictable outcomes, and the business of financial planning (bear with us on this). You sow seeds, lovingly tend them and measure their progress regularly; but external events can have as much an effect on whether or not they will bear fruit as your own efforts; just as with financial investments. Economic downturn and divorce can decimate financial plans, however carefully you have tended them over the years. Although there’s little that we can do to assist in managing the next big financial crash, there are suggestions we can make for helping protect your financial plans, to some extent, from divorce.
As regular readers will know, either spouse can ask the court to redistribute money or property owned by either or both of them on divorce. The court will look at a list of factors in deciding to make an order, and will consider what each party needs, whether there are any issues of compensation to be managed, and how any wealth should be shared. Where there are sufficient assets to meet everyone’s needs, the courts often treat pre-owned or inherited assets differently.
Whether the resources are significant or negligible, the aim is to get to a fair solution. You don’t have to use the courts, of course: settlements on divorce can be mediated, achieved through collaborative law, or negotiated directly or by solicitors. The court is there as a last resort, if you’ve tried different ways to agree between yourselves and have been unable to obtain a meeting of minds. You can read our factsheets on what financial orders the court can make on divorce, and the principles it abides by, and we’ve also written a blog on your options for working things out.
With each new high profile divorce case splashed over the media, family lawyers and their colleagues in the trusts and tax planning side of things find themselves faced with requests from their clients to find ways to protect family assets from being diminished by awards made in the family courts. There are things that can be done, but most require thinking ahead – sometimes a long way ahead.
It’s true to say that the best way to protect your assets from the effects of divorce is not to get married. The court doesn’t have any general power to redistribute assets on the breakdown of an unmarried relationship. That said…
In the rare cases where a couple’s assets exceed their separate needs on divorce, one way of separating out pre-owned or inherited assets is to keep them out of the ‘family pot’. So, for example, if an inheritance is kept in its original form and not mixed in to family assets, you will be able to argue that this particular property has no matrimonial character – likewise with pre-owned assets, or those acquired after separation.
Where assets have been held through several generations, for example a family business or farm land, careful planning by the family and its advisers can offer protection. The best protection comes from schemes (usually trusts) created well in advance of any proposed marriage, and which are properly structured and documented. So timely planning, well before the younger generation acquire romantic notions, is to be advised.
Aside from complex trust structures, the best form of protection is a properly drafted pre-nuptial agreement. These are becoming increasingly popular for couples who are marrying later (or for a second time) and have pre-owned assets which they do not want to lose, for couples with unequal wealth, or for those who just want certainty and a dignified exit should their marriage fail.
Pre-nuptial agreements are not completely watertight under English law, but where the agreement is freely entered into and where both parties understand its implications, courts will generally respect the principles of the agreement unless it would be unfair to do so. We wrote about the current state of the law on pre-nuptial agreements, and who might benefit from them here and you can download our information sheet here.
The process of negotiating a pre-nup can feel a bit intimidating, and inevitably people find planning for what should happen if a marriage doesn’t work to be difficult. We recommend a collaborative approach to preparing and drafting the document. Sitting round a table with your other half and the solicitors can often be a friendlier and more efficient way of sorting things out and planning for all eventualities without derailing the wedding plans.
Some people use offshore trusts and corporations for their wealth protection. Keeping assets offshore does not mean that the courts cannot make orders against them, but the wealth protection factor comes because it is certainly more difficult to get those orders enforced against assets overseas. Many of the “big money” cases in the family law courts concern the difficulties of tracing assets through different jurisdictions and structures, and then getting the orders adhered to. It is true that cases with an international wealth element tend to be more difficult, and depending on context, use of offshore trusts may be viewed by the court to be evidence of trying to avoid its jurisdiction– a subtle, but important, difference from the other ideas we have written about here.
If you would like to discuss any aspects of asset protection on marriage with us, please give Adam, Sue, Gail or Simon a call on 01223 443333.