by Irpreet Kohli
"Pre-nuptial agreements aren't binding so is there any point?"
The above are all too familiar comments from clients and intermediaries who, like many, are unaware of how far pre-nuptial agreements have come and how valuable they can be as asset protection tools for those looking to protect and preserve their wealth. This article deals with some of the basic elements of agreements and how they can assist you and your clients.
"I'm already married so I guess I have to hand over 50% of my assets if I get divorced."
What is a pre-nuptial agreement?
It is a contract agreed between a couple before they get married setting out how they would want their assets to be dealt with if they were to later divorce.
I'm already married though - isn't it too late for a pre-nuptial agreement?
No it's not. Enter the "post-nuptial agreement". This is a similar contract that is drawn up between a couple but when they are already married. Contrary to belief, post-nuptial agreements are drafted more frequently than pre-nuptial agreements due to their use as asset protection documents by individuals who, for example, are tax planning and structuring their assets, have recently received large sums of money or are looking to pass down wealth to the next generation.
When should I consider a pre-nuptial or a post-nuptial agreement?
You should speak to a family lawyer if any of the following situations apply to you or your clients:
- When one party to the marriage receives, or will soon receive, inheritance that they wish to protect from a relationship breakdown.
- When consideration is being given to tax structuring and the passing of wealth to the next generation. This is an ideal time to start a discussion about nuptial agreements as they can be presented to the next generation as a financial planning necessity, in the same way as wills and LPAs, rather than later being introduced in the more sensitive scenario of being something that is required due to a distrust of potential future spouses.
- When parties are beneficiaries of trusts, including when they are simply one of a class of discretionary beneficiaries, and there has been, or will be, distributions from the trust. This is particularly the case if those distributions are being 'mingled' with matrimonial assets.
- When parties have pre-acquired assets they have built up or received from a previous divorce that they would wish to ring-fence from any potential future relationship breakdown.
Are these agreements binding?
A Court will generally uphold the terms of the agreement if it has been properly drafted by experienced lawyers and the provisions of the agreement are 'fair' and leave neither party in financial difficulty, unless the Court are presented with a substantial reason not to uphold it.
The Courts do retain the overriding ability to ultimately decide what the financial provision should be and this is to ensure that no individual would end up in a predicament of real need due to the unfair terms in a nuptial agreement.
Are there any guidelines to make these agreements more binding?
Yes. All agreements should have the following safeguards considered when they are drafted:
- Both parties should obtain independent legal advice on the terms of the agreement and each adviser should sign a confirmation that they have given advice which should be attached to the agreement.
- There should be appropriate material financial disclosure so each party knows and understands the financial background of the other before they agree to the financial settlement being proposed.
- Pre-nuptial agreements should be finalised and signed no later than 28 days before the date of the wedding. A post-nuptial agreement does not have a similar timescale but any agreement should be signed only after both parties have had sufficient time to digest and take advice on the terms of it.
Is it possible or necessary to have both a pre-nuptial agreement and a post-nuptial agreement?
In some scenarios, it may be advisable to have both pre-nuptial and post-nuptial agreements. This is most relevant where it is difficult or impractical to finalise the pre-nuptial agreement 28 days before the wedding.
"I don't really discuss a client's personal life so it is awkward to bring up these agreements"
This is understandable and a common concern. The way to present these to your clients is to align them with Wills, LPAs and insurances. We advise about Wills and LPAs to protect and regulate a client's affairs on death and various insurances to deal with other times of difficulty they may face. A pre-nuptial or post-nuptial agreement may be invaluable if your client was to separate and they had been able to protect and regulate their assets by having more control over the financial settlement.
If you are unsure about whether they are relevant to your client's particular circumstances, feel free to contact the Family Team at Freeths to have an initial call and we can let you have some initial thoughts.
Be ahead of the game and ensure that you and your clients have used every asset protection tool available to regulate and deal with their finances.