We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
05 December 2019
Role of nuptial agreements
Nuptial agreements and family culture
Particular considerations for international couples
Nuptial agreements are a crucial component of wider family wealth planning. They provide financial and jurisdictional certainty in the unfortunate event that a marriage breaks down and are particularly important for international couples with links to England. This article considers the many benefits of nuptial agreements for international families and why they are more important than ever in the context of Brexit.
Wealth protection strategies reduce the risk of wealth being dissipated or lost and help 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's or an individual's wealth – recent publicity suggests that Amazon founder Jeff Bezos will pay his wife MacKenzie Bezos approximately $35 billion following the breakdown of their 25-year marriage. In England, multimillion-pound divorce settlements are far from uncommon (there is a reason why London is known as the divorce capital of the world).
For families seeking to preserve their wealth for future generations, a divorce can be expensive and disruptive, with the most hard-fought divorce cases lasting two or three years. In addition to the emotional toll, legal fees can be significant, and the cost of a settlement can significantly deplete a family's finances. There are also other hidden costs – for example:
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. While they can be used in that way, their greater utility in this context is their ability to reduce uncertainty and therefore risk.
Wealthy families are increasingly mobile, and many will have connections with several countries in addition to England. 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. However, it is highly likely that a party seeking a divorce will have a choice of jurisdictions and that choice can hugely affect the size of the likely award and the likelihood that payment of any sums due under the award can be enforced. The practice of forum shopping is well established and can lead to protracted litigation in multiple jurisdictions.
A nuptial agreement can significantly reduce the risk of forum shopping by fixing jurisdiction in one state. Alternatively, it can be drafted so as to be effective in each state that may have jurisdiction.
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 broad or 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.
A nuptial agreement can ensure that fair provision is made for the economically weaker party on divorce, while 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.
A nuptial agreement should be drafted with existing asset structures in mind. For instance, the agreement should set out the mechanism whereby trustees will be requested to assist in the event of divorce.
Equally important is that existing structures are stress-tested to ensure that they are sufficiently robust if they are challenged in the event of divorce. Specialist family lawyers should be consulted on how to reduce or mitigate risk in this regard.
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 will 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's wealth are expected to enter into nuptial agreements.
A nuptial agreement should provide a couple, and their wider families, with certainty about the financial consequences of divorce. The English courts are likely to uphold a nuptial agreement provided that both parties had disclosure of the other's wealth and received 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 pressured to sign the agreement.
Provided that those criteria are met, parties can be reasonably certain that their agreement will be upheld in England. This greatly reduces the likelihood of time-consuming and expensive litigation if the marriage does break down.
Legal and cultural attitudes to prenuptial agreements vary greatly from country to country. In many jurisdictions, nuptial agreements are common. 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 or 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 courts will apply the same level of scrutiny to such agreements as they would to English prenuptial agreements.
Couples who know at the time of marriage that they will have a footprint in another country as well as England should consider a nuptial agreement. For such couples, there are broadly speaking two options:
While the outcome of Brexit is not yet known, the current impact for international couples with links to England 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 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. While frequently regarded as unfair, this rule has the advantage of providing certainty and avoiding litigation in more than one country.
If the United Kingdom leaves with a deal, the existing family law regime will continue between the United Kingdom and other EU states for a transitional period until new arrangements can be negotiated and implemented.
If the United Kingdom leaves with no deal, 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 European Union. However, as far as each individual EU state is concerned, England will become a non-EU state and its national law will apply to questions of divorce jurisdiction. There is no certainty that the first-in-time rule will continue to apply between EU member states and England.
For EU families with English connections, a nuptial agreement can provide 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 should have it reviewed. As Brexit was seriously contemplated only two years ago, many nuptial agreements have been drafted on the basis that the status quo would continue. Such agreements should be reviewed to ensure that they are futureproof, whatever the outcome of Brexit.
For further information on this topic please contact Simon Blain at Forsters LLP by telephone (+44 20 7863 8333) or email (firstname.lastname@example.org). The Forsters LLP website can be accessed at www.forsters.co.uk.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.