Protecting wealth from family disputes

No-nups, Pre-nups, Post-nups – and Beyond

In a business and professional context, successful individuals devote a significant proportion of their time and energy creating, growing and nurturing their wealth over many years. However, a lack of basic caution in the one’s personal life can leave that wealth dangerously exposed in the event of a family dispute.  Sonny Patel, an English-qualified family law solicitor based in Dubai, discusses how wealthy individuals can inadvertently leave themselves vulnerable, and what can be done. The article considers ‘pre-nups’, ‘post-nups’ and ‘no-nups’.

No-nups (cohabitation agreements for unmarried couples)

A decision to cohabit with a partner outside of marriage can lead to unintended consequences. Although “common law” marriage is a persistent myth, a cohabiting partner might be able to establish an interest in the property in which they are living, even if it is held in the other party’s sole name. Disputes between cohabitants regarding their interests in property are determined in accordance with the law of trusts, which is a rather unwieldy and complex body of statute and case law.

A non-legal owner may be able to establish a beneficial interest in a property owned by the other party in the following ways:

  1. That he or she contributed in money or money’s worth to the purchase and therefore that it was the cohabitants’ common intention to hold the beneficial interests in proportion to their contributions (“a resulting trust”).
  2. That there was a common intention that they should have a beneficial interest and that they have therefore acted to their detriment on this basis (“a constructive trust”)
  3. That the cohabitant legal owner has led the non-legal owner cohabitant, either by words or conduct, to believe they have a beneficial interest, as a consequence of which the non-legal owner has acted to their detriment, making it unconscionable for the legal owner to insist that they have total beneficial ownership of the property  (“proprietary estoppel”)

A cohabitation agreement, or “no-nup” is a living together agreement for couples who are not married. They clarify in legal terms the financial arrangements between the parties, making it clear who owns what, in the event of a split. A no-nup definitively records the parties’ intentions and therefore avoids the costs and uncertainty of a potential dispute regarding ownership or property.

Pre-nups and Post-nups (prenuptial and postnuptial/ marital agreements)

It is an extraordinary truth that when two people get married they usually have little idea what they are signing up for in terms of legal obligations. There is nothing printed on the back of the marriage certificate explaining the terms of the agreement they have just entered into. The legal obligations that arise on marriage are usually brought into focus only when a couple decide to separate and begin the process of unravelling the legal ties that marriage creates.

In the event of a divorce the English court has very wide powers to reallocate assets regardless of the strict legal ownership of those assets and who brought them to the marriage. This means that assets acquired before the marriage, or gifted to or inherited by one party are vulnerable in the event of divorce. A matrimonial home usually has a central place in a relationship and therefore is most likely to be regarded as matrimonial property available for sharing, regardless of the source of funds used to purchase the property.

Marriage also subjects each party to a basic legal duty to take responsibility for each other’s financial needs. On divorce, that financial responsibility does not abruptly come to an end. After capital is shared there is usually a residual responsibility to an ex-spouse the form of continuing spousal maintenance. The English courts are (in)famously generous when it comes to ongoing maintenance obligations. “Joint lives” (indefinite) maintenance orders are common after a long marriage or where there are children. The amount of maintenance is usually decided with reference to the standard of living that the couple enjoyed during the marriage.

It against this background that a pre-nuptial agreement (pre-nup) could be described as a method by which the court’s very wide discretion can be restricted. Historically the English courts paid little attention to the existence of a pre-nuptial agreements, but the law has evolved. English courts will now give effect to a 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 their agreement.

How to ensure a binding agreement

What this means in practice is that certain steps must be taken to ensure that the pre-nup or other agreement is upheld at a later date:

  1. Both parties must take independent legal advice;
  2. Both parties must make full and frank financial disclosure to each other, and that disclosure should be attached to the agreement;
  3. The agreement should be signed no less than 21 days prior to the marriage;
  4. The agreement should make it clear who will have control of assets acquired by either party prior to the marriage and how jointly acquired property should be divided upon any future divorce;
  5. There should be a formal review of any pre-nuptial agreement upon the birth of a child.

Pre-nups are particularly effective at protecting assets that have been acquired by one party prior to marriage or by way of gift or inheritance.

Post-nuptial agreements are subject to the same requirements as pre-nuptial agreements and have the same effect. The obvious difference is that they are entered into after marriage and therefore there is no specific timescale by which they must be signed.

Depending on the levels of wealth under consideration, a “belts and braces” approach might combine a pre-nup with other forms of asset protection structures such as a Trust, a Foundation or Family Investment Company. The timing of the creation of such a structure, and the source of the funds are crucial otherwise the structure itself could be could be vulnerable to a legal attack.

In the absence of a nuptial agreement, or a trust, the wealthier party to a relationship should, at the very least, take care to arrange the family’s finances in a way that keeps pre-acquired or inherited funds as separate as possible. If such non-matrimonial assets are intermingled with matrimonial assets it is harder to argue that they should be treated differently.

When one is considering personal wealth protection strategies it is essential that bespoke specialist advice must be taken from the correct combination of professional advisors, and at the earliest opportunity. The costs of implementing asset protection strategies should always remain proportionate to the assets at stake and the likely effectiveness of the structures that are put in place.

Sonny Patel is an English qualified solicitor at Expatriate law specialising in high net worth international divorce, and negotiating and drafting prenuptial agreements.