On divorce, a couple’s assets – including business assets and inheritances - must be shared fairly. But is it possible to protect such assets from the sharing exercise? This will be particularly important to consider when the assets include, for example, a business or family farm.
There are three ways in which to legitimately protect assets on divorce:
• Pre-nuptial or post-nuptial agreement;
• Trust and/or incorporation;
• Keeping them separate from matrimonial assets.
Nuptial agreements
Parents might want to encourage their adult children to enter into a nuptial agreement if they have made or intend to make significant financial dispositions to the children, particularly if such dispositions include business assets. Parents should take independent advice before making the dispositions since there may be Inheritance Tax considerations. Still, they will also want to understand what they can do to protect their gifts or loans from falling into the hands of their son- or daughter-in-law in the event of a divorce.
This might be particularly relevant to farming families, who may have owned the farm for generations or where a significant share in any other family business is being transferred. Such families may want any prospective sons or daughters-in-law to enter into a nuptial agreement to ringfence these assets from any claims on divorce.
Nuptial agreements are increasingly commonplace and are not just for the wealthy. The court will uphold such agreements so long as (1) they comply with the necessary formalities and (2) they are fair. What is ‘fair’ will depend on the circumstances of the case at the time the divorce takes place. At the least, ‘fair’ means that the financial provision meets both parties’ needs. ‘Needs’, in this context, is infamously difficult to define because it will depend largely on the standard of living enjoyed during the marriage, with each case being unique.
So long as the agreement complies with the formalities and is fair, it will be upheld. For this reason, nuptial agreements are a must if you want to ringfence assets and keep the family business safe in the event of a future divorce.
Trusts and incorporation
Once assets are placed into trust, they are no longer in direct ownership, and the court’s divorce powers are much more limited, particularly if the trust is held offshore.
Expert advice should be sought. Trusts can be complex and expensive to run. Furthermore, once the assets are transferred to the trustees, the owning spouse will have little or no control over them. The non-owning spouse may be prevented from claiming a share of them on divorce, but the owning spouse might not have them either.
‘Incorporation’ refers to the transfer of assets into a company that might be held in trust. Again, the transfer may put the assets beyond the reach of the non-owning spouse but might also mean that the owning spouse doesn’t get them either.
Timing is important. If assets are transferred with the intention of defeating financial claims on divorce, then the court can set aside such transfers. The transferring spouse may also face a bill for the other party’s costs. If the transfer takes place shortly before (or after) separation, it might be easier to find an evidential link between the transfer and an intention to defeat the other party’s claims.
Non-matrimonial assets
It is presumed that matrimonial assets will be shared equally between the parties. Non-matrimonial assets are not subject to that presumption. If, therefore, a party inherits assets during the marriage and keeps them separate until the divorce, such that they remain non-matrimonial, there is a good chance that on divorce, they will not be subject to the sharing presumption. Similarly, if a party owned a business or property before the marriage, it might be possible to claim that such assets are non-matrimonial. Even if they have become matrimonialised over time, the presumption of equality does not apply.
Accordingly, if you keep your assets separate, including inherited assets, gifts or wealth you owned before the marriage (including business assets), you may protect them from your spouse’s claims on divorce.
Conclusion
Each party must provide financial disclosure on divorce. While it might be tempting not to disclose particular assets, attempts to hide them will often end in failure and unwanted costs orders. Good advice should be sought. The client can often be reassured about the relevance of certain assets.
Better still, advice should be sought prior to the marriage or gift and proper arrangements – such as a nuptial agreement - made to protect the assets. Keep the situation under review and continue to make such arrangements as things change over time.
