Everyone hopes and expects their relationship will last forever. But what if it doesn’t? Recent press coverage of London being the “divorce capital of the world” and of the contrasting lack of rights for unmarried couples has led to more awareness of the consequences of relationship breakdown. People are realising the usefulness of planning ahead to try and minimise the risks of litigation.
Enquiries about protecting assets from the fallout of relationship failure tend to fall into three categories:
- people about to move in with their partner;
- couples about to marry; or
- parents who would like to gift money to their children but want to protect it in the event of divorce.
Planning ahead is not cynical. It may help to limit the emotional and financial damage caused by relationship breakdown. Being aware of the legal framework and addressing its implications can have huge benefits if a relationship ends.
People starting their first serious relationship are more likely to cohabit than to marry. More people live together outside of marriage than ever before. There is no such thing as a “common law” husband or wife and there is no right to support on relationship breakdown simply because people have lived together for a length of time.
The Law Commission, the Government's advisory body on law reform, has just published recommendations that cohabitants should have limited rights in certain circumstances – summarily, where they are needed to redress an imbalance arising from the relationship – but legislation in this area is still some years off.
Under the current legal system the starting position is that unmarried couples have no claim against each other’s property or assets. However the law is complex and there are caveats, such as, where a couple has a child, the person with whom the child lives has claims for child maintenance and possibly housing. If a couple buys or transfers a house into joint names, they may each own 50 per cent of the value of the property, even if one person made a much larger financial contribution than the other (or always pays the mortgage). If a home is owned by one person, their partner can potentially make a claim against the property if they make a financial contribution to the property or if it was agreed that they should acquire an interest in the property. The position is clearer in respect of savings, investments and other assets. It is very difficult to make a claim against these assets if they belong to your partner.
Planning for cohabitants
Couples who want to live together should complete a declaration of trust, a document that spells out who owns the house (and in what shares). This is likely to be 100 per cent binding (although if they subsequently marry, or register their civil partnership, the courts can ignore it). If they purchase a property together, the conveyancer should set this out in the transfer document.
Partners can also prepare a cohabitation agreement, which can cover all sorts of arrangements, such as who will pay which bills, ownership of possessions and what should happen if the relationship ends. This would not be binding on relationship breakdown, but would hold great sway with the court in the event of a dispute.
Marriage and civil partnership
On divorce or dissolution, the court acquires very wide-reaching discretionary powers to adjust a couple’s finances. Assessing what the court may do is an art rather than a science and the goalposts move regularly. The typical settlement awarded by a court ten years ago could be totally different to the award made to the same couple today.
In this situation, the court retains ultimate control. This is the flip side of a system that benefits from the discretion to tailor a settlement to a family’s needs. The court has a statutory duty to ensure children’s welfare comes first and it will also step in to ensure fairness if necessary (which typically means applying the “yardstick of equality” to any settlement). It is impossible to shut the courts out but there are some measures you can take to influence their discretion.
Premarital agreements are not strictly binding, but increasingly the courts are taking them into consideration on divorce. A postmarital agreement might be useful to deal with a change of circumstances during the marriage, such as receiving a large gift or inheritance. Protective trusts can be useful for families, but must be approached with caution. A trust set up because of an upcoming marriage can be altered by the court. An established discretionary settlement may provide protection against claims, but the court will look at the reality. If a couple has enjoyed a comfortable lifestyle supported by the trust, the court is likely to assume that this resource will continue to be available in the future.
The courts are presently developing the concepts of separate “matrimonial” and “non-matrimonial” assets: what is really part of the family pot, and what has been kept separate or has arisen before or since the marriage. However, this distinction will never override the importance of financial “needs”, which (after the children’s welfare) is the overriding factor in each case. Problems lie in separating out the assets where they have become intermingled over the years. A premarital agreement can help by defining these assets in advance. The recent case of Crossley has shown that a premarital agreement can serve to reduce the court time allotted for dealing with financial proceedings, and therefore both parties’ legal costs, even if one party seeks to overturn the agreement for some reason.
Thinking about separation is not easy. It is an uncomfortable subject. But awareness of the legal framework can and should play a crucial role in financial planning. Perhaps more importantly it can help limit the chances of emotionally and financially damaging litigation between people who are already dealing with the breakdown of a relationship.