It is a truth universally acknowledged that an individual in possession of a good fortune must be in want of asset protection.
The question for that individual's advisor is how best to protect that good fortune, if the individual is also in want of a wedding. In English law, there are two common structures through which those assets can be protected: nuptial agreements, and trusts.
Trusts
A commonly held misconception is that assets held in trusts are automatically excluded from the court's grasp when distributing assets on a divorce. This is not the case; the financial remedy court has wide-reaching abilities to invade and even vary the terms of some trusts.
If a court finds that a trust is a 'nuptial settlement', then it is able to make orders relating to the assets in the trust, and add or remove beneficiaries. The definition of a nuptial settlement is very broad and decided on a case-by-case basis, but if the trust is created in contemplation of marriage, then it is very likely to be considered a nuptial settlement, and therefore capable of variation by the court.
Even if a trust is not found to be 'nuptial', it will likely still be considered a resource of the beneficiary party, especially if the family has been using distributions from that trust to meet their needs over the years. That means that the other party may not have an entitlement to share in their former spouse's interest in the trust, but that interest will likely be taken into consideration when calculating how the parties will meet their needs.
The court will also consider whether the trust is even legitimate in the first place; if the court finds that it was established as a sham to frustrate the other party's claims on divorce it is likely to be completely disregarded and the assets treated as available for distribution as though no trust existed at all.
Even in the case of a legitimate discretionary trust, where no individual beneficiary has a defined interest in the trust assets, but only a right to be considered for a benefit by the trustees, the court may decide that given the way that the trust has historically made distributions to the party in question, it is safe to infer that the trust will make a distribution to the party if they request it. This means that an interest in a discretionary trust may be seen as liquid and accessible cash for the purpose of satisfying the other party's claims.
While the court has power to make an order to vary a trust wherever the trust and its assets are based, in the case of an offshore trust, it will also need to consider whether such an order will be enforceable in the relevant jurisdiction or jurisdictions. In addition, the court will usually try to take into consideration the interests of other beneficiaries, and avoid making an order that would deprive them of their prospective benefit.
In either of these scenarios, the court may decide to deal with the issue by awarding the non-beneficiary party a greater share of the non-trust assets than would otherwise be the case, rather than seeking to vary the trust itself.
Given the above, it is clear that, despite what many advisors think, trusts are not a guaranteed way to protect assets from the far-reaching grasp of the family court.
Nuptial Agreements
English family lawyers have been drafting and agreeing nuptial agreements for decades, on the off chance that at some stage they might be given decisive weight. Eventually, in 2010, the case of Radmacher v Granatino reached the Supreme Court, and all our dreams came true.
As of 2010, while not automatically enforceable, nuptial agreements are considered as part of the circumstances of the case when dividing the assets, and there is a generally accepted principle that their terms will be followed as long as they were "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 their agreement."
Since 2010, case law and Law Commission guidance has created a helpful checklist for how to ensure that agreements comply as closely as possible with that principle, and therefore have the greatest chance of being upheld by the court:
- The agreement will usually contain certificates from both parties that they are not under pressure or undue influence, and that they understand the rights they are waiving by signing the agreement;
- The parties must have exchanged financial disclosure in sufficient detail for them to understand their rights and the implications of the agreement;
- The parties must have had plenty of time to consider and negotiate the terms before signing and in advance of the marriage (28 days is typically considered a sufficient period before the wedding);
- The terms of the agreement must be fair (usually assessed by checking that both parties can meet their needs after implementing the agreement).
The best way to ensure that all of these factors can be proven is for both parties to receive independent legal advice.
Provided that these conditions are met, a court will give the agreement its full weight. The rationale for this is that the parties are adults who should be able to make their own decisions, and it would be paternalistic for the court to intervene in an agreement that is fair, and which was entered into freely and with the benefit of legal advice.
In broad terms, there are two ways to seek to undermine a nuptial agreement. The first is to argue that it was not freely entered into or that the parties did not understand the implications. The second is to argue that it would not be fair to be held to it.
The first bar is a factual one. Can the party seeking to undermine the agreement prove that they did not understand its terms, or that they were subject to undue influence or duress? It is hard to prove this when in receipt of legal advice, and the court has recently stated that being under pressure to sign a nuptial agreement is not the same as being under undue pressure.
The second bar is a legal one. It is not enough to argue that without a nuptial agreement the award received would have been different; that will almost always be the case. The question is whether the terms of the agreement mean that a party to the marriage is not able to meet their needs. Most well-drafted agreements contain backstop provisions to ensure that needs are met. Most well-drafted agreements also include review clauses, requiring the parties to renegotiate the terms of the agreement if some significant change occurs that might change a party's needs (e.g. the birth of a child, a bankruptcy, etc.), which protects the validity of the agreement even in case of a significant change.
Nuptial agreements are family law structures designed by family lawyers for family courts. They are understood intrinsically by the judiciary and in most cases are enforced as drafted, subject to the usual cross-check against needs.
Decision time
To take no protective steps at all leaves wealthy parties vulnerable to the dreaded sharing principle, where all matrimonial assets are divided equally. The sharing principle won't apply to non-matrimonial assets, but these arguments are expensive to run, and there is no guarantee that they will be successful. They also significantly increase the likelihood of contention between the parties, which everyone (even the lawyers!) would like to avoid if at all possible. It is therefore understandable that it is increasingly common for wealthy individuals to turn their minds to asset protection in anticipation of a wedding.
Trusts are valuable structures in which to hold and protect family wealth; they would not exist otherwise. However, they are not designed especially to protect assets in a divorce. If an individual is attempting to achieve this, it makes sense that they should use a structure specifically designed for that purpose; the nuptial agreement.
Even if an individual already uses trust structures for wealth planning, they can always ensure additional protection by entering into a nuptial agreement. Belts and braces go very well with a top hat and tails.
Want to hear more from us? 
