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Money can't buy you love

Governance : Divorce

Watching a child get married is an emotional time for any parent, especially if you think their partner is unsuitable. But how can you prevent the family business being affected by a potential divorce settlement? Karen Jones explores the growing world of "pre-nups".

Jones is a freelance journalist based in the UK.

The reality of modern stresses and strains is such that those planning a lifetime with a beloved partner may not get past the first year before divorcing. In a world where your children are likely to be well-educated, how does the modern parent counsel children about marriage, divorce and losing part of the family business?

According to the press, pre-marital agreements are the "new black", although they seem a relatively new phenomenon in Europe. There are three types: a standard "pre-nup", which is a contract between two individuals to create understanding about what will happen to their assets in the case of divorce; a "mid-nup", which is a regular review of the pre-nup and is required every five years or so or if children come along; and a "pre-cip", which is essentially a pre-nup used for same sex marriages.

However, while pre-nups are sensible, their very mention could stir up resentment from the child or divide a family.

An essential part of marriage?
North America is usually ahead of the curve on wealth and social issues, so I asked legal advisor Warren Whitaker, partner at 400-lawyer firm Day Pitney in New York, for his advice. Whitaker, who works with multi-billionaire families on the issue of children and pre-nups, says: "I think the biggest mistake parents make when their child is approaching marriage is to push them into a pre-nuptial agreement against his or her wishes. Parents should keep in mind that initial concerns about a partner usually soften when grandchildren arrive a few years later."

Whitaker advises his clients to be very careful, particularly in a first marriage: "I would encourage parents to look at their own estate plan rather than insisting on a pre-nup for children. Usually it is the parents who have the money, not the child. The use of trusts is a viable way to pass benefits to the child whilst protecting certain assets from a spouse."

In the UK, pre-nups are not legally binding, but they are being increasingly viewed as an essential part of marriage commitment as judges favour parties using them and matrimonial settlements tend to be smaller. 

The value of trusts
Although trusts are an acknowledged global "vehicle" for the transfer of wealth to children, they've come under scrutiny in the UK by the government in the last year, which has reduced the tax benefits for inheritance purposes. In addition, a divorce case, Charman v Charman, has brought trusts into the limelight and shown they are not immune to the court's gaze when settlements are being decided.

Mrs Charman believes the trust, which was set up by her husband, should be included in their final divorce settlement. Mr Charman says it was set up as a "dynastic" trust to give money to future children and wants it "ring-fenced" away from the main divorce. However, none of the documents in the case show that the trust was set up for this reason despite being handled by professional offshore trustees and legal advisers.

The case has gone to the Court of Appeal and judges will deliver the final ruling any day now on whether the £68 million in question should be divided up. If the Court of Appeal agrees with the High Court that it was not set up as a dynastic trust, Mrs Charman's settlement is likely to increase.

Following this and other recent UK legal precidents, advice to parents and their children considering marriage is "get a pre-nup", according to Richard Moyse, partner at private client law firm Boodle Hatfield, which works for a number of wealthy individuals in the UK. He says: "In general, there is trepidation about court orders coming out in Britain, including the Charman v Charman case. If Mrs Charman's settlement rises to 45 or even 50%, the topic of pre-nups will become more important. They will be needed to protect families from losing substantial portions of wealth in contested divorce settlements."

Moyse confirms the current British legal view on pre-nups: "They are not legally binding but they are influential, particularly in a short marriage and, if there are no children, can be highly persuasive." He adds a warning that there has to be full financial disclosure and prior independent legal advice for both parties and that courts insist a pre-nup is fair even when the parties divorce. As well as this, it should include proper financial provision for children.

He explains that the content of a pre-nup depends on each individual: "There is no standard document as such. Although quite often you can exclude specific property (for example, inherited property), this does not apply generally to the matrimonial home. It must include full disclosure from all parties and make a record of what will happen when the marriage breaks down. It must also provide for the less well-off partner and children. Finally, there should be a review or mid-nup within five years and an automatic review if a child is born."

Different countries – different laws
There are also views about whether you should include a specific law clause on where the couple will divorce. Moyse cites the case of Ella v Ella, an Israeli couple who had a pre-nup in Israel governed by Israeli law but decided to live in the UK. The English Court felt that the pre-nup swung the vote in deciding that the divorce should be heard in Israel where the terms of the pre-nup would be likely to stick. In the UK, Mrs Ella would have probably received a more favourable settlement.

"It's an interesting idea that couples decide at pre-nup stage where they will divorce," says Moyes. "Where there are potentially competing jurisdictions, the first to serve divorce papers may get the country of their choice. We assume in the Abramovich £11 billion divorce that he served divorce papers first because it was heard in Russia. The UK would probably have been more favourable to his wife." He adds that if couples are frequently moving abroad, pre-nups need to be regularly reviewed to take their changed circumstances into account.

Moyse understands that talking to children may be difficult. "It is all a bit of a turn-off for children," he says, "but parents have to try and get across to them that 50% of their money or assets, like a property or trust, will just be taken away if things go wrong. Although it is very difficult to raise the topic, we have to advise families that they should tackle it.

"We have one wealthy client who has asked me to write him a letter explaining the financial implications if a marriage breaks down that he can share with his child who is about to get married. He wants to have a sensible discussion."

Sofie Hoffman, also a solicitor at Boodle Hatfield, offers an example of how a private family business could manage the process: "If a son in his 30s is heir to the family business, you can understand his family or the other shareholders wanting an agreement that the business will not form part of his assets in divorce. In this case they could set up a 'family charter', which means the family and those involved with the business would fully understand all the issues involved with inheritance or divorce.

"We strongly advise wealthy families to have pre-nups for children, provided the pre-nup is properly drafted and the correct formalities have been followed," she adds.

 So although America takes a cautious view, it is probably best in the UK to tackle the issue of pre-nups long before children turn up with a husband or wife on their arm.

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