The use of nuptial agreements for International Families and the impact of Brexit
Nuptial agreements are a crucial component of wider family wealth planning. They provide financial and jurisdictional certainty in the unfortunate event that a marriage break down. They are particularly important for international couples with links to England.
Simon considers the many benefits nuptial agreements for international families, and why they are more important than ever in the context of Brexit.
The risks
Wealth protection strategies are devised to reduce the risk of wealth being dissipated or lost, and to mitigate any risks that can be identified. For example, the risk of currency fluctuation can be mitigated by hedging, the risk of losing key personnel can be mitigated by life insurance, and the risk of incurring unnecessary tax can be reduced by careful structuring.
Divorce can pose a significant risk to a family or individual’s wealth. Recent publicity suggests that Amazon founder Jeff Bezos will pay his wife MacKenzie Bezos in the region of $35 billion, following the breakdown of their 25-year marriage. Multi-million pound divorce settlements are far from uncommon in England: not for nothing is London referred to as the “divorce capital of the world”.
For a family seeking to ensure that wealth is preserved for future generations, a divorce can be hugely expensive and disruptive. The emotional toll on all concerned is well-known. Legal fees can be significant. The cost of the settlement can significantly deplete the family finances. But there are other, hidden, costs: a protracted divorce can lead to business paralysis. Injunctions may be granted, severely curtailing business operations. Trusts, family businesses and trusted advisers may be required to disclose documents or even joined as parties to the proceedings. The most hard-fought divorce cases may last for two or three years, causing significant disruption.
The role of nuptial agreements
A nuptial agreement can reduce or mitigate these risks.
A common perception of nuptial agreements is that they are designed to limit the extent of one party’s financial claims. Whilst they can be used in that way, their greater utility in this context is their ability to reduce uncertainty, and therefore risk.
Jurisdiction
Wealthy families are increasingly mobile, and many will have connections with several countries. A great deal of thought may have been given to where individual family members reside, where they are domiciled, and where assets and structures are located.
The rules regarding jurisdiction for divorce are complex, and vary from country to country. It is highly likely, however, that a party seeking a divorce will have a choice of jurisdictions, and that choice can hugely affect the size of the likely award, as well as the likelihood that payment of any sums due under the award can be enforced. The practice of “shopping” for the most favourable jurisdiction is well established, and can lead to protracted litigation in multiple jurisdictions.
A nuptial agreement can fix jurisdiction in one state. Alternatively, it can be drafted so as to be effective in each state that may have jurisdiction. A well-drafted nuptial agreement can significantly reduce the risk of jurisdiction shopping.
Asset definition
A nuptial agreement will typically define which assets form part of each party’s separate property, and which constitute joint property. The agreement will then establish rules for how the different classes of assets are to be divided in the event of divorce. The rules may be very broad, or very detailed.
A well-drafted nuptial agreement can provide certainty about the extent of the parties’ assets, and how they are to be divided in the event of divorce.
Wealth preservation
A nuptial agreement can ensure that fair provision is made for the economically weaker party on divorce, whilst nonetheless preserving family wealth for future generations. For instance, a home can be settled subject to a life interest, rather than by outright transfer, or a separate structure can be established from which maintenance is paid during the recipient’s lifetime, with the structure later reverting to family ownership.
Existing structures
A nuptial agreement should be drafted with existing asset structures in mind. For instance, the agreement should set out the mechanism whereby trustees are to be requested to assist in the event of divorce.
Equally important is that existing structures are “stress-tested” to ensure they are sufficiently robust if they are challenged in the event of divorce. As specialist family lawyers, we have extensive experience of the way in which the family courts approach complex structures, and will be able to advise what steps should be taken to reduce or mitigate risk.
Nuptial agreements and family culture
Family dynamics can be complex. It is rarely easy for one family member to suggest to another that they should obtain a nuptial agreement. Trusted advisers have a key role in ensuring that nuptial agreements are discussed, and the advantages are understood.
Older generations can encourage future generations to enter into nuptial agreements by making it clear in letters of wishes that trustees are to look more favourably on those who have done so.
Similarly, family constitutions can be drafted so as to confirm an expectation that family members wishing to share in the family wealth are expected to enter into nuptial agreements.
Predictable outcome
A nuptial agreement should provide a couple, and their wider families, with certainty about the financial consequences of divorce.
A nuptial agreement is likely to be upheld by the English court, provided both parties had disclosure of the other’s wealth, and had independent legal advice about the consequences of entering into the agreement. The agreement must also make fair provision for the economically weaker party, and neither party must feel unduly pressurised to sign the agreement.
Provided those criteria are met, the parties can be reasonably certain that the agreement will be upheld. This greatly reduces the likelihood of costly and time-consuming and expensive litigation, if the marriage does break down.
Particular considerations for international couples
Legal and cultural attitudes to prenuptial agreements vary greatly from one country to another. In many countries, nuptial agreements are commonplace. In others, they are virtually unknown. In many EU and Latin American states, couples will routinely elect a matrimonial property regime when they marry, which will determine how their property will be divided, on death as well as on divorce.
International couples should not assume that the English courts will uphold a nuptial agreement or a matrimonial property regime entered into in another state. The English court will apply the same level of scrutiny to such an agreement as it would to an English prenuptial agreement.
Couples who know at the time of marriage that they will have a footprint in more than one country are strongly advised to consider a nuptial agreement. For such couples, there are broadly speaking two options:
- The first is to enter into a series of separate, but crossreferenced, nuptial agreements in each country. The advantage of this approach is that each agreement will be drafted so as to have the strongest possibility that it will be upheld by the courts in the relevant country. The disadvantage is that such agreements can be cumbersome and expensive.
- The second is to have one “lead” agreement, which includes clauses that require a review, or a new agreement, if the couple move and are no longer able to rely on that state’s jurisdiction. The advantage of this approach is that it is flexible, and allows for the fact that future plans may be uncertain. The disadvantage is that it can lead to further negotiation and expense in the future.
Brexit
Whilst the outcome of Brexit is not yet known, the current impact for international couples is increased uncertainty.
The rules for establishing jurisdiction where a couple could potentially divorce in more than one EU member state are a matter of EU law. In very broad terms, they provide that the divorce should proceed in the country where proceedings are first instigated. This is the so-called “first-in-time” rule. Whilst frequently regarded as unfair, this rule has the advantage of providing certainty, and avoiding litigation in more than one country.
We do know that if Britain leaves with a deal then the existing family law regime will continue between the UK and other EU states for a transitional period, until new arrangements can be negotiated and put in place.
If the UK leaves with no deal, then the UK government has prepared a series of statutory instruments which will attempt to replicate the existing family law legal arrangements between England and the EU. However, as far as each individual EU state is concerned, England will become a non-EU state, and their national law will then apply to questions of divorce jurisdiction. There is no certainty that the “first-intime” rule will continue to apply as between EU member states and England.
For EU families with English connections, a nuptial agreement can provide them with certainty in uncertain times. A nuptial agreement drafted now, while the outcome of Brexit is unknown, can be drafted to take account of different outcomes.
EU families who have an existing nuptial agreement would be well advised to have it reviewed. Until two years ago, the idea that Britain might exit the EU was not seriously contemplated and therefore nuptial agreements were drafted on the basis that the status quo would continue. Such agreements should be reviewed to ensure they are future-proof, whatever the outcome of Brexit.
To find out more about nuptial agreements please check out our guide.
