A nuptial agreement can be a useful tool for wealthy individuals and families seeking to preserve their wealth for future generations.(1)
Wealth protection strategies are devised to reduce the risk of wealth being dissipated or lost and 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 former 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 a family's 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.
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 this 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. 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 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 to be effective in each state that may have jurisdiction. A well-drafted nuptial agreement can significantly reduce the risk of jurisdiction shopping.
A nuptial agreement will typically define which assets form part of each party's separate property and which constitute joint property. The agreement will also establish rules for how different classes of asset will 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.
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 a recipient's lifetime, with the structure later reverting to family ownership.
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 courts, provided that both parties had disclosure of the other's wealth and 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 litigation if the marriage breaks down.
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 they are sufficiently robust if challenged in the event of divorce.
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 that 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 to confirm an expectation that family members wishing to share in family wealth will be expected to enter into nuptial agreements.
- "Top five myths about nuptial agreements: dispelling the most common misconceptions";
- "Benefits of signing a nuptial agreement";
- "Tips for discussing nuptial agreements";
- "Practical process of obtaining a nuptial agreement"; and
- "International aspects to a nuptial agreement".
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.