David Ruck Partner
When should a client have a ‘pre-nup’
David Ruck's article was first published by Professional Adviser on 27 July 2017.
David Ruck explains what pre-nuptial agreements actually are, their ultimate enforceability and whether financial advisers should advise their clients to enter into one.
The precise legal status of a pre-nuptial agreement (PNA) and whether or not it is sensible to advise clients to enter into one remain the subjects of much debate.
With that caveat made, this article will look to offer some general information on the nature of the PNA, its status in English law, its ultimate enforceability and whether financial advisers should advise clients to enter into one in the hope of preserving family assets should a marriage end in divorce.
A PNA is a contractual agreement entered into by the parties to a marriage or civil partnership that seeks to regulate the couples’ financial affairs during their relationship and upon that relationship breaking down.
The agreement may cover assets acquired both before and during the relationship, and couples enter into PNA’s for a variety of reasons including:
- To ensure, if at all possible, their respective ‘separate assets’ – usually what they bring into the marriage – remain theirs if the relationship fails, as well as assets that are given or left to them by their respective families during the course of the relationship.
- To avoid or limit any dispute over the distribution of the family assets in the event of the relationship breaking down.
Although PNAs are becoming increasingly common, it remains relatively unusual for a very young couple with few assets to enter into an agreement of this sort unless they have been guided in that direction either by parents, trustees or financial advisers.
Where there are potentially substantial family assets and, in particular, where one party is likely to inherit substantial sums, or may already have received capital from their parents to enable them to purchase a property, often it will be the parents, or possibly trustees, who seek to arrange a PNA in an attempt to preserve “family” assets.
It may also be the case that family financial advisers will become increasingly involved in suggesting to their clients and/or their client’s children that a PNA is a relevant mechanism by which steps can be taken to try to preserve family assets from the potentially damaging effects of divorce.
Is a PNA enforceable on the dissolution of a relationship?
As the law presently stands in England and Wales, it is not possible to exclude the ultimate jurisdiction of the court upon a dissolution of marriage – that is, a divorce – to make whatever order it deems appropriate for the benefit of either party.
That said, the case of Radmacher v Granatino, which was heard by the Supreme Court in 2010, gives general guidance as to the extent to which a PNA should be taken into account on divorce. This case confirms that, while these agreements may not be “fully binding”, the weight to be given to them on divorce may now be very substantial.
The wording of the court in this respect was that: “The court should give effect to a [pre-]nuptial agreement that is fully entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold a party to their agreement.” This means it could be argued that, in effect, a PNA will be enforced unless there are substantial reasons for not enforcing it.
In 2014, the Law Commission proposed new legislation should be introduced to make “qualifying” PNA’s fully legally binding. To ensure a PNA “qualified”, the parties would have to comply with certain criteria, which were as follows:
- There must be no fraud, undue influence or misrepresentation;
- The agreement must be signed no less than 28 days prior to the wedding, and must contain a statement the couple understand the agreement is a qualifying nuptial agreement, which will partially be at the court’s discretion to make financial orders;
- Both parties must have had legal advice; and
- Both parties must have made full disclosure as to their financial positions.
These criteria would apply to both pre and post nuptial agreements and, provided they are complied with and the needs of the separating couple and any children have been taken into account, the Law Commission has recommended these qualifying agreement should be fully legally binding.
The matter remains with the Ministry of Justice for consideration as to whether legislation should be drawn up on the basis of these proposals but, given the present political situation, it is unlikely any further steps will be taken to make PNAs binding for some time yet.
What do PNAs usually seek to do?
Obviously, the contents of an individual PNA are dictated by the circumstances of the particular parties but the most common type simply seeks to preserve the parties’ separate assets – namely those they bring into the marriage and potentially also receive from their families by way of gift or inheritance – as assets that are not subject to distribution to the other party on divorce.
It is common for the joint assets of the parties – namely those built-up between them by joint endeavour since the date of the marriage – to be divided between the parties, usually in equal shares. Obviously, should the parties’ financial circumstances be significantly different, the terms of the PNA may be different – for instance providing the weaker economic party with a fixed sum for each year the marriage or civil partnership persists.
It is clear that, when advising on the general preservation of a family’s assets, both legal and financial advisers should now be giving very serious consideration as to whether a PNA should be entered into by a couple, in the hope of preserving various assets.
In short, a pre-nuptial agreement, if entered into by the stronger economic party, can do little harm and it may do a great deal of good. The same, unfortunately, cannot be said for the weaker party, whose ability to seek a share of certain assets on a divorce may be seriously compromised.