Protecting assets in marriage: are prenuptial agreements worthwhile?

As the summer wedding season approaches, more people may be considering putting a premarital/prenuptial agreement (prenup) in place. Whilst they may appear to be rather unromantic in the sense that they are planning for the failure of the marriage, they can provide everyone with some certainty and can avoid much acrimony further down the line if the marriage does not go to plan. They are especially useful if there are assets to be protected/kept separate if, for instance, there is substantial family wealth to protect or if a spouse wishes to protect assets for children from a first marriage when entering into a second marriage.

How financial claims on divorce work

• There are very few fixed rules. The rules are fact-specific to each divorce, involving flexible interpretation of broad principles.
• There are three principles in play – ‘sharing’ and ‘needs’ and ‘compensation’, although the latter is not that common.
• ‘Sharing’ means dividing equally the labours of the marriage (i.e. matrimonial property) but allowing spouses to retain assets each has brought into the marriage (or inherited or been given during it), i.e. non-matrimonial property.
• The shorter the marriage, the greater the opportunity to ringfence property but it should be noted that the length of the marriage is normally taken from the commencement of cohabitation to separation.
• A matrimonial home is usually defined to be matrimonial property (and therefore shared equally) regardless of the source of the purchase monies.
• ‘Needs’ are assessed generously (not the ordinary meaning of the word) and mean housing and income. The element of generosity increases when children arrive given the financial sacrifices of the primary carer.
• Financial dependence by the weaker party on the stronger party also matters. The court has sympathy where someone has made significant life choices for the sake of a relationship.
• The court award will be the higher of the result given by the needs principle and the sharing principle.
• If meeting one spouse’s needs means using the other spouse’s non-matrimonial property, the court will do so very readily.

What protection does a prenup provide?

The above only applies where spouses have signed no prenup; a prenuptial agreement, however, changes the dynamic.

Prenups, freely entered into with a full appreciation of implications, will be upheld on divorce unless it would be unfair to do so (Granatino v Radmacher). Effectively, such prenups are not binding like a commercial contract, but they become the default position.

There are two types of issue which might make the prenup unfair, and they are procedural and financial:

1. Procedural issues mean:

• Financial disclosure being given on both sides prior to the agreement being entered into.
• Independent legal advice having been given to both spouses prior to entering into the agreement.
• No unfair pressure on either spouse, which means that time for reflection is important before entering into the agreement.

2. Financial issues mean:

• The court cannot leave a spouse in a ‘predicament of real need’ but that means a number of things in different cases. For instance, it might mean meeting needs, simply, as in the case of Ipekçi v McConnell or it could mean a harsher test which concerns essentially the alleviation of hardship as in the case of Cummings v Fawn or it means whatever the judge wants it to mean, as in the case of HD v WB.
• The absence of clarity from case law is that the second option above, i.e. the harsher test, concerned simply with the alleviation of hardship as in Cummings v Fawn, is probably correct but this needs to be resolved by the Court of Appeal. Caution, therefore, is needed.

In practice, judges often decide whether the financial provision is broadly within the right area and make findings on the prenup accordingly, but the trend is certainly for agreements to carry greater weight and for procedural arguments to carry lesser force. A prenup is likely to have substantial weight if a court is determining the split in assets and income on divorce going forward.

Types of prenups

There are different types of prenups:

• Agreements which are very general and specifically exclude a particular asset or assets in the event the marriage breaks down.
• A very detailed agreement which sets out the exact provision if the marriage breaks down in less than a year, within one to three years, three to five years, five to seven years, ten to fifteen years, fifteen to twenty years and twenty years and over, and either with children or without children.
• Agreements setting out principles that should apply in the event the marriage breaks down within certain timescales and if there are any children of the marriage or no children.

Prenups setting out principles are often more thoughtful and more helpful because they are not so rigid and provide more clarity. They also mean that regular reviews are not needed. In most cases, reviews hardly ever take place, largely because no one wants to start talking about these issues when the marriage is happy. These sorts of prenups involve less tension and anxiety in the lead-up to a wedding but do give the reassurance that everyone involved requires.

It is possible to provide for a percentage of the family home that one spouse will have, whether or not there are children, along with any provision for a holiday home, emergency funds and reasonable income needs. These principles are particularly useful where one of the spouses is from a particularly wealthy/high-net-worth background or has brought significant wealth to the marriage. The housing fund can be based on a percentage of the gross value of the matrimonial home and provide a bedroom for the spouse and one bedroom for each child of the family, together with one spare room and in reasonable proximity to the matrimonial home. This is to facilitate movement between the homes in relation to the children and access to any schools attended by the children and, similarly, a fund for a holiday home can be stated, which is then linked to the Consumer Price Index.

Reasonable income needs can be prescribed, taking a percentage of the average of the combined annual expenditure of the spouses in the last three years of the marriage. This excludes any interest or capital repayments in relation to any mortgage and any expenses and care for the benefit of any children of the family. The term for the maintenance can also be agreed based on the length of the marriage or, where there are children, the greater of either the length of the marriage or the date of separation and the point at which the youngest child of the family reaches 21 years old. Lifelong maintenance can be provided if the marriage is 15 years in duration or longer.

Where there are children, it is very easy to provide for child maintenance based on child maintenance principles and, where there is substantial wealth, it would seem appropriate for any maintenance claims to be dealt with on a clean-break basis so that a lump sum is paid on divorce, rather than paying ongoing spousal maintenance. However, similar principles could be utilised where the assets are not so substantial and where ongoing maintenance is to be paid rather than achieving a clean break.

If there is wealth to be protected, it is better to have a prenup in place to provide clarity should the marriage breakdown. It can save lots of stress and costs later but can be put away in a drawer in the meanwhile and forgotten about.

If you have any questions or concerns about prenuptial agreements or any other family query, please contact Emma Harte.