The Power Of Trusts And Prenuptial Agreements To Protect Wealth In Divorce
Divorce can have a profound impact on personal and family finances, particularly for those with significant assets. Whilst the court’s main aim is fairness, this often results in wide-ranging redistributions of wealth, leaving high net worth individuals and families potentially vulnerable. There are two legal tools at your disposable: a prenup and a trust which, when used carefully, can offer robust protection.
Nuptial agreements
A nuptial agreement is a bespoke document tailored to a couples’ specific requirements entered into either before the marriage (premarital or prenuptial agreement, aka “prenup”), or subsequently (postnuptial agreement, aka “postnup). Where this article refers to a prenup, it also applies to a postnup. A prenup can set out how assets will be divided in the event of a divorce or separation. Despite some common misconceptions, prenups are gaining traction as a practical and essential means of safeguarding wealth and securing financial clarity. In the absence of a prenup, assets generated during the marriage (including the family home even if it is pre-acquired) are typically subject to sharing. Any assets that are pre-acquired or non-matrimonial in nature otherwise can still be included in the matrimonial pot in order to meet needs.
How does the Court treat prenups?
Unlike in some European countries where marital regimes are standard, English courts historically viewed nuptial agreements with scepticism. However, in recent years the landscape has shifted significantly and now prenups are generally being upheld provided they meet certain criteria. Prenups are not binding in England and Wales, but are given persuasive weight if they fairly meet each party’s needs. In addition to fairness, both parties must obtain their own independent legal advice, enter into it freely and must provide full financial disclosure.
Why are prenups valuable?
- Wealth protection
Prenups are particularly valuable (and common) for individuals with substantial assets, family wealth, businesses or inheritance concerns. By clearly classifying what assets are to be shared and which assets are ring-fenced, a prenup can prevent prolonged and costly disputes. - Clarity and certainty
With a prenup, both parties enter into the marriage fully aware of how their assets will be treated during the marriage. Specifically, whether those assets are subject to sharing or not. A prenup reduces uncertainty and emotional stress as the parties will have already agreed on the financial terms amicably, therefore making any divorce proceedings less costly and less stressful. A well-drafted prenup can provide peace of mind and security for both parties. - Fairness across the board
Prenups serve to protect both parties, not just the wealthier spouse. For example, provisions can be included to ensure that a financially weaker spouse is fairly supported while respecting the desire to preserve pre-marital wealth.
Prenups are no longer the exclusive domain of the super-rich. They are a practical, flexible and increasingly common tool for wealth protection. Whether you are entering the marriage with significant assets, or have potential substantial inheritance in the future or simply wish to avoid uncertainty a prenup can provide an invaluable safety net.
Trusts
A trust is a legal arrangement where a settlor transfers assets to trustees for the benefit of named beneficiaries. Trusts can take many forms including discretionary (at the discretion of the trustees), life interest trusts and fixed interest trusts. They are often used for estate planning, the preservation of wealth across generations and in some limited circumstances for Inheritance Tax mitigation. For the purposes of this article, we are only looking at discretionary trusts.
How is a trust treated during a divorce?
The family Court has wide-ranging powers to redistribute assets upon divorce to achieve a fair outcome. This can include varying or accessing trust assets, where the trust was created for the benefit of the parties during the marriage (a nuptial settlement) depending on the nature and purpose of the trust. The court can also, in the alternative, consider the trust a financial resource to the spouse thereby awarding the spouse less of the matrimonial assets on the basis they have access to the trust assets. However, a well-drafted trust can make it significantly more difficult for one spouse to access assets intended to remain protected.
To give your trust the best chance of withstanding any claims, it should be drafted prior to the engagement and ideally before the relationship has started. It is important to get advice from a specialist particularly because it will need to be drafted in such a way which takes into account your tax position and access to funds.
Conclusion
Whilst nuptial agreements and trusts each offer protection individually, their combined use creates a more comprehensive approach to wealth preservation. Whilst a trust can safeguard inherited assets, a prenup can outline how any income or distributions from the trust will be treated during the marriage. To ensure that your agreement is given decisive weight as a method of wealth protection, it is advised to draft your trust and prenup in advance of the wedding, rather than during the marriage, and ensure that it is drafted correctly with the benefit of independent legal advice. For more information on prenuptial agreements and the likely cost of a prenuptial agreement please speak to one of our solicitors in the family law department. Whilst we have family law solicitors in London we are able to offer a nationwide service and can assist clients throughout England and Wales.
Our solicitors provide expert legal advice on family law and private client matters. Our team specialises in helping individuals protect their wealth with prenuptial agreements and trusts. Contact us on 0330 822 3451 for tailored support or request a callback.