Succession Planning

Divorce

Divorce and its impact are never far from the headlines.  The simple reason is that, for most divorcing couples, the financial impact is huge. A divorce settlement may require the sale or refinancing of a family business, or the sale or refinancing of properties held by the family for a number of years. Trusts may be varied and careful retirement planning can be left in tatters.

This is why it is important that wealthy individuals and those wealth management professionals advising them understand both how the Family Court deals with a couple's finances on divorce and the steps that can be taken to protect wealth from a divorce.

The reach of the English court

Jurisdiction is a complicated topic, but essentially, the English court will have jurisdiction where either, or both, of the parties are living in England.  Alternatively, a claim can be brought when neither party is living here, but, depending on the circumstances, either one or both of them are domiciled here.

English courts are more generous to the financially weaker spouse than almost anywhere else, which is why London is often described in the media as the "divorce capital of the world".  So, even those in the country for fixed periods, perhaps on a long term secondment, can be divorced here and need to understand the consequences, if they separate from their spouse during that time.

Where European countries are concerned, the first person to bring proceedings secures jurisdiction, so swift action is needed where more than one country has jurisdiction.

What claims do spouses have on divorce?

Each party to a marriage has claims against the other for capital and income on divorce and the English court has a broad range of powers at its disposal, perhaps broader than any other country in the world, to achieve what it considers to be a "fair" result.  Income claims are often dealt with by way of a capitalised lump sum to achieve a "clean break" between the parties, particularly where there are sufficient assets and liquidity, but if this is not possible, the court will order a party to pay the other periodical payments (alimony).

What is "fair"?

There is no standard formula to calculate what is "fair". A list of factors is set out in statute, which the court has to consider, the most significant of which is the welfare of any child of the family under the age of 18.  In addition, alongside the statute, English case law guides both advisers and judges.

The landmark decision in White v White in 2000 introduced the principal of equality; the contribution of a spouse who is the homemaker is just as valuable as the financial contribution of a breadwinner.  This was further developed some years later in the well- publicised cases of Miller and McFarlane, where the House of Lords reiterated that marriage is a partnership of equals, so each is entitled to an equal share of the assets of the partnership, unless there is a good reason to the contrary.

What then might constitute a good reason for departing from equality?

Needs

The court must consider the financial needs of both parties, both for housing and income.  It is possible (and not uncommon in lower value cases) for the financially weaker party to be awarded more than half of the total pot, in order that he or she can rehouse him or herself with the children.

In terms of housing needs, the court will look at where the parties need to live and in what size of property, taking into account the needs of dependent children.  Clearly, in this way, the lifestyle adopted during the marriage impacts upon the needs of the financially weaker party.

Inherited or Other Non-Matrimonial Assets and Post-Separation Accruals

The existence of inherited or non-matrimonial assets (for example an investment property purchased before the relationship began) is a strong argument for departing from equality.  Likewise, if there is a delay between separation and divorce, and during that time one party to the marriage has accrued significant funds, he or she will want to argue that those funds are not divided equally upon divorce.

Cases will all turn on their own particular facts, but some general points can be made.

The first point to note is that these arguments will not succeed where those funds are required in order to meet the needs of the financial weaker party.

Second, the extent to which those funds have been "mingled" with other, matrimonial, wealth is also relevant.  For example, if an inheritance has been used to fund the purchase of a home lived in by the parties, it will have lost its non-matrimonial character.  On the other hand, if it has been preserved in the form in which it was inherited and not drawn upon, it will have retained its non-matrimonial character.

A Pre-Nuptial Agreement

Another reason is the existence of prenuptial agreement.  While not strictly binding, pre-nuptial agreements in England and Wales are stronger than ever before.  Following the Supreme Court case of Radmacher in 2010, the court should give effect to a pre-nuptial agreement that is "freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to the agreement".

The significant impact that a pre-nuptial agreement can have is illustrated by the 2014 case of Luckwell v Limata. The parties had entered into a marital contract, specifying that they would each retain their own assets. At the time that the marriage came to an end, by which time they had three young children, the wife had more than £6.5 million of wealth, whereas the husband had nothing - no home, no capital, no income and considerable debts.

For this reason, the judge did not stick rigidly to the terms of the agreement but ordered the wife to provide him capital to meet his debts and a housing fund of £900,000, around half of which would revert to her when their children grew up, and the remainder of which would revert to her upon his death.

Although this may seem a large award in the husband's favour, the judge said that had it not been for the agreements, he would have awarded the husband a larger housing fund, and the whole of it outright.

As a result of the marital agreement, the husband would never be able to touch the capital it was purely to provide him with housing and half of it would revert to the wife once the children had grown up.

The existence of the marital agreement made all the difference to the outcome of the case.

Foreign Pre-Nuptial Agreements

Individuals who enter into agreements elsewhere, but are divorced in England, may think that they can simply rely on the foreign agreement (which may well be strictly binding in the country in which it was made). Unfortunately this is not the case.

The English court will conduct its own assessment of whether or not the agreement was "freely entered into by each party with a full appreciation of its implications" as per the test in Radmacher.

For this reason, it is imperative that individuals take specialist English legal advice if they think that they may move to England at some point in the future, or if they have some other connection that may form the basis for a divorce here. The marital agreement can then be tailored to ensure that it is given the greatest weight by an English judge, or if the marriage has already taken place, a further agreement post-nup can be entered into.

Special Contribution

Whilst rare, another reason for a departure from equality is one party's "special contribution".  In Cooper-Hohn v Hohn in 2014, it was successfully argued that the husband's "financial genius" warranted a departure from equality in his favour.

The Use of Trusts

If one of the parties to the marriage is the beneficiary of a discretionary trust, how does the English court view the funds within the trust upon divorce?

The answer is that the court can vary a "nuptial settlement", and allow a spouse to invade it upon separation or divorce.

A nuptial settlement is any arrangement, including of course trusts and foundations, which makes some form of continuing provision for both, or either, of the parties to a marriage.  For this reason, at the point at which you consider settling assets in trust, or when a family beneficiary is getting married, it is vital to take advice on whether the trust would then be considered to be "nuptial" by the English court.

Summary: How can wealthy individuals protect themselves from claims?

• The most effective, if unromantic, way of protecting wealth from financial claims on divorce is not to get married at all.

• Where there is a marriage, a pre or post nuptial agreement will assist. The agreement must provide for both parties' financial needs and those of the children, otherwise it will not be considered "fair".  If the agreement makes reasonable provision for the financially weaker party, both parties have received legal advice and there has been disclosure of financial resources then (providing there are no vitiating factors, such as duress), it is likely that the court will uphold the agreement.

• Keep non-matrimonial or inherited assets separate. The more inherited or gifted assets are used or co-mingled with matrimonial assets, the more likely they are to be shared.

• The simplest and most obvious way to protect funds held in trust is to ensure that the trust is not nuptial, as then the court has no power to vary it.

• Consider carefully where to bring divorce proceedings and if another jurisdiction is a possibility, take swift action to secure it.

Ultimately, the outcome of a case is at the judge's discretion and no two judges will arrive at the same conclusion on the same set of facts.  There is a bracket in which a financial settlement will be considered fair; which end of the bracket a settlement falls depends on how the parties run their case hence the importance of good legal advice.