Asset Protection on Divorce
“It is a truth universally acknowledged that a man in possession of a good fortune must be in want of a wife”. The opening sentence of Jane Austen’s Pride and Prejudice may be contrasted with the quotation from James Turner QC which appeared a year ago in the Sunday Times: “If you are a wealthy man or are likely to receive wealth in the future, you would be absolutely bonkers to get married from a financial point of view”. Different times, different values – and different matrimonial laws.
Mr Turner’s comments have their origin in the ground-breaking judgement of the House of Lords in White -v- White (2000). In that case it was held that the assets of a divorcing couple should be divided not just to meet the reasonable requirements of the economically weaker party; instead, divorce settlements were to be judged against “the yardstick of equality” and Courts were to explain any departure from an equal division of assets. For Mr and Mrs White, who had been married for 33 years and farmed in partnership, the judgement meant that Mrs White was awarded £1.8m (40%) and her husband the remainder out of their £4.6m of total assets. The highly publicised Miller and MacFarlane divorce cases have further demonstrated the Courts’ generosity to the “stay at home” wife.
Sadly, between one-half and one-third of marriages in the UK fail. In the case of farmers, land owners and owners of private companies the question arises whether it is possible to take steps to guard against the break-up of the family farm or estate, or family company, in the event of divorce. Three strategies merit consideration.
Pre-nuptial Agreements. At present pre-nuptial Agreements cannot remove the jurisdiction of the Courts in England and Wales to decide the terms of a fair divorce settlement. Pre-nuptial Agreements can, however, be highly persuasive in the Court’s decision provided certain procedures have been observed, ie:
- Both parties receive legal advice.
- Both parties make full financial disclosure.
- Neither party is unfairly pressured into the Agreement.
- Proper consideration is given to the arrival of children.
- The Agreement is entered into in good time before the marriage.
These points must be satisfied if a party is to have any success in persuading the Court that significant weight should be placed upon the pre-nuptial Agreement e.g. an Agreement which preserves wealth brought into the marriage by one party or assets acquired by that party during marriage by way of inheritance.
A Trust. Either as an alternative, or in addition, to a pre-nuptial Agreement, trusts can sometimes offer considerable protection. Trust interests have to be disclosed on divorce as part of a party’s resources and the Courts can take account of a trust interest as a “resource” without making an Order against the trustees themselves. The Court may make an Order against a beneficiary personally that is beyond his private means but in the expectation that his trustees will bale him out. The disaster scenario of a Court Order against the trustees (and therefore the trust assets) themselves can, however, usually be averted if the trust is set up at the right time (preferably before the married couple have even met), if it is clear from the trust document that spouses of the settlor’s children cannot be brought within the class of beneficiaries, and if the trust is accompanied by a strongly worded “letter of wishes” highlighting the settlor’s desire to create a vehicle that will hold the family wealth for the benefit of future generations. Such trusts are usually discretionary in form and it also helps if strong-minded or professional trustees are appointed who will be robust enough to fend off unwelcome claims.
Before setting up a trust, proper tax advice should of course be taken. In this context it is comforting that the 100% relief from inheritance tax (IHT) that applies to certain agricultural property and business assets survived the Government’s IHT onslaught on trusts contained in the Finance Act 2006. The transfer of such assets into trust will often also qualify for hold over relief from capital gains tax (CGT), thus avoiding an upfront CGT charge on creation of the trust.
Articles of Association etc. Where family companies are involved, additional mechanisms can be employed that will strengthen the protective shield. These might include prohibition in the Articles of Association on the transfer of shares in specie to a spouse; pre-emption rights; or provisions confining a spouse’s potential beneficial interest in the shares to an income interest only. In some circumstances it may be more practical to settle for a recent innovation i.e. a family charter, signed by family members and to which new spouses adhere on marriage, which emphasises that the benefit of share ownership is the provision of an income stream for the “custodian” for the time being of the shares, and highlights that their capital value should endure for future generations.