Ways of Protecting Family Wealth on DivorceDate: 12/04/2020 Type: Articles Topic: Finances | Author: Abby Buckland - Kingsley Napley LLP
Parents are increasingly reluctant to provide financial assistance to their adult children because they are concerned that the money could be lost in a divorce. We are often approached by anxious parents who are keen to ensure that family wealth intended for their children and grandchildren won’t fall into the hands of their estranged son or daughter in law, should they later divorce. Gifts, advancements or inheritance from one spouse's family, however, are in principle generally treated differently by the divorce courts from matrimonial assets generated by the parties during their marriage. The principle that non-matrimonial assets remain protected, including those held in trust structures, was confirmed in the case of Daga v Bangur  EWFC 91, in which Jane Keir and I represented the successful respondent wife. The decision in this case reinforces the comfort that English law, for the most part, excludes family assets from the divorce process.
There are, however, a number of proactive steps that parents can take to help preserve wealth intended for their blood family.
Prenuptial agreements are often used to protect family wealth and any contributions parents have made, or intend to make, to their children. If a parent wants to make a gift, transfer properties or assets, or leave inheritance to an adult child, but protect them from division in the event of a future divorce, a prenuptial agreement is essential. Some parents make it a condition of a gift or advance that such an agreement is entered into.
After marriage, a postnuptial agreement serves the same purpose and can be entered into at any time.
There is no act of Parliament in England and Wales making these agreements binding, but in practice they will be enforced so long as they are freely entered into and do not lead to an unfair outcome for one party.
A properly drawn up loan agreement can also protect contributions to an adult child's finances. If the parent expects repayment at some point, this should be set out in writing when the money is advanced. In a divorce, it will be far easier to persuade a judge that the contribution from one party’s parents towards the deposit on the family home was a firm loan which needs to be repaid, rather than a gift, if there is a clear, contemporaneous agreement drawn up and signed. This should set out the sum to be loaned, the purpose of the loan and detailing repayment terms and conditions.
Setting up a trust to preserve wealth for future generations is potentially the most effective mechanism to protect family wealth on divorce. A trust is set up for a number of reasons, including to control and protect family assets when a person is too young to handle their affairs, or to pass on assets while the giver is alive.
The trustees (who can be family members, independent professionals, business colleagues, friends or a mixture) act out the giver's wishes and are the owners of the assets held in a trust. In most cases, the trust will be discretionary and therefore the trustees decide which of the beneficiaries receives what, when, and on what terms.
However, the Family Court can attack a trust in a number of ways:
· It can find that the trust constitutes a ‘nuptial settlement’, i.e. that there is a connection between the settlement and the marriage or that it makes "some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children" (Lord Nicholls in Brooks v Brooks). If this is found to be the case, the court can make an order to vary the trust.
· The court can also challenge the validity of the trust, either by finding an issue with its technical creation or deciding that it is a ‘sham’ trust. One of the most common reasons for determining that a trust is a ‘sham’, is that the settlor retains a level of control that undermines the powers and duties of the trustees. If this is found to be the case, then the protection that the trust offers is at risk of being lost and the assets may be found to be personal assets of the settlor. Expert advice needs to be given to the settlor at the outset and any letter of wishes must be carefully drafted.
· Finally, the court can view the trust as a financial resource of one party and make orders accordingly. This is perhaps the most common form of attack against trust assets in a divorce and often the hardest to protect against. Thought needs to be given at the trust’s inception, throughout its lifetime and at the time of any divorce proceedings in order to defend the trust assets appropriately against being considered a potential financial resource.
A trust must always be created with a planned and detailed defence in place to ensure it does what is intended; effectively and reliably protects assets. Collaboration between advisers at an early stage is absolutely crucial to pre-empt and protect against the pitfalls and consequences of marriage and divorce.
It is necessary to look at all the options and understand the implications of each in order to protect family wealth in the eventuality of divorce. We have experience of advising both parents and adult children and work closely with our private client team and other relevant advisers to ensure the appropriate protections are in place. We are also aware of the difficulties and tensions these situations can create for families. Our advice and action is therefore firm and robust, yet sensitive when the situation requires it.