17 December 2021

Divorce: Protecting the intergenerational transfer of wealth

In 2011, 40% of Jersey's population were married, 8% were remarried and 10% of the population were divorced.[1] Whilst we eagerly await the results of the recent 2021 census, we expect the results to continue to show that a notable and significant proportion of the population have married and later divorced.

Divorce is a financially significant event. Marriage creates duties between spouses and the court has a wide discretion to make a range of financial orders on divorce, including in respect of the transfer of capital/ property or the payment of maintenance. The court is guided by the overriding principle of fairness and is tasked with the role of ensuring that where possible, at a minimum, both parties are able to meet their needs.   

Very few people enter a marriage contemplating that they may one day divorce, but given the above-noted statistics and the potential seismic impact of divorce on parties' finances, safeguarding against the impact of future divorce is a sensible part of financial planning. These considerations are, in our experience, often overlooked and the potential safeguards, including the use of trust structures and pre-nuptial agreements (discussed below) are often put to the bottom of parties' to do lists. After all, we lead busy lives and are, in the good times, commonly minded to focus on working hard to create and generate wealth and less interested in how to protect the wealth generated from the claims of a future spouse. Whilst safeguards against the financial risk of divorce are not directly relevant to growing wealth, they can play an important role in protecting and preserving wealth.

Of course, every individual and every family is different and will have different concerns and the extent to which an individual or family will want to protect against the risk of divorce varies. Some people, often due to a past experience of divorce in their family, take the risk very seriously. One of the common situations that crosses our desks is that of a wealthy UHNW or HNW family in which the wealth-creating parental generation would like to transfer wealth down to their children, commonly as part of wider succession planning goals, but is concerned to ensure that the wealth they have worked so hard to generate is not eroded by the later divorce of one of their children, or via costly litigation in respect of financial claims brought by a son or daughter-in-law on divorce.   

It is prudent to note at the outset that gifts and advancements of inheritance by parents are generally treated by the family court as a different type of asset when compared to the 'pot' built up by the parties during their marriage. However, this does not put such assets outside the family court's discretionary exercise and it is sensible to proactively protect, as far as possible, such assets from a future spouse's potential claims. 

Use of trust structures

Discretionary trusts are regularly used for a wide variety of financial and succession planning purposes, but they are also a potentially useful means to protect wealth on divorce.     

The treatment of discretionary trusts when resolving parties' finances on divorce is one of the most complex areas of matrimonial law and the treatment of a trust in which one of the spouses is a beneficiary will very much depend on the relevant facts of the case.

Beneficiaries to a discretionary trust have no automatic entitlement to trust assets or income. Therefore, whilst such trust interests must be disclosed when resolving finances on divorce, the starting point is that the assets contained in the discretionary trust are beyond the beneficiary's control. However, depending on the circumstances of the case, there are two main ways that such trust interests can be taken into account on divorce – (1) as a financial resource and (2) as a nuptial settlement, in which case the court has various powers in respect of the trust. It is noted that the concept of a nuptial settlement is considerably narrower in Jersey than in England and Wales.     

It is important, given the statistical chance of divorce within the beneficial class, that trustees, beneficiaries and their advisers are alive to the risks of divorce and seek specialist legal advice where appropriate.    

Pre-nuptial agreements

Pre-nuptial agreements are not automatically binding on a court, as parties to an agreement cannot fetter the discretion of the court to consider the parties' finances and appropriate settlement on divorce. However, since the seminal case of Radmacher in England and Wales [2], and the resulting case law in this jurisdiction, parties to a pre-nuptial agreement should be prepared to be held to the terms of the agreement they have reached and, indeed, save for a vitiating factor such as non-disclosure, should expect to be.   

The Court in Radmacher noted at paragraph 75 that:

"The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.”

A pre-nuptial agreement will not be upheld if it does not provide for a spouse's needs and those of any minor children, as it will not be considered to be fair. The job of a specialist family lawyer is therefore to pre-empt how the family court is likely to consider your circumstances and draft your pre-nuptial agreement to meet your spouse's needs, whilst protecting your wealth. In our experience, carefully considered and properly drafted pre-nuptial agreements are likely to have a decisive impact on the outcome of a case and be upheld by the court. They therefore have the potential to be a useful tool in a party's wealth protection strategy and are not only a consideration for the very wealthy, but are useful in a range of circumstances. People often ask if pre-nuptial agreements are worth the paper they are written on and the answer is yes, but it is important to take early legal advice – we can tell you in an initial call if a pre-nuptial agreement is likely to be beneficial in your circumstances.   

Given the highly discretionary nature of the family court and its reputation for looking behind structures where it is considered just and fair to do so, no wealth protection strategy can be entirely bulletproof. The strength of wealth protection strategies tends, therefore to come from their number and from adopting a layered approach. Pre-nuptial agreements are not only highly valuable wealth protection tools in their own right, acting in a matter akin to an insurance policy, but can also work in conjunction with trust structures to provide an additional layer of wealth protection. Indeed, trust instruments commonly provide that beneficiaries must have a pre-nuptial agreement in place in order to benefit from the trust.

We consider it essential that an effective wealth protection strategy should include obtaining early and specialist family law advice to proactively manage the risk of (future) divorce and consider the protective steps that can be taken in the good times, to potentially save money in the long run and avoid or minimise expensive future litigation.

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[1] Jersey Census 2011 - population characteristics

[2] Radmacher (formerly Granatino) v Granatino [2010] UKSC 42

 

An original version of this article was first published by Businesslife magazine, November 2021.

© Carey Olsen 2021.

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