What is the benefit to families in making a prenuptial agreement?

Prenuptial agreements can be used to protect family wealth and to ensure a fair settlement for all parties without the necessity of going to court.

This article relates to international families and their use of prenuptial agreements to make wealth planning decisions for the future. We look at what they are, how the courts view them in different jurisdictions and how and why they are currently being used.

What are prenuptial and postnuptial agreements?

‘Pre-nuptial agreements’ are also referred to as pre-marital agreements, ante-nuptial agreements and often shortened to ‘prenups’. They are contracts made by two parties in contemplation of marriage. They outline each party’s responsibilities and property rights in the unfortunate event of their marriage breaking down.
A ‘post nuptial agreement’ is one which is entered into during the marriage and may be, as with a prenuptial agreement, made in case of marital breakdown, or one which has been made following the breakdown of the marriage (a ‘separation agreement’). Post nuptial agreements made in contemplation of marital breakdown are often drawn up to re-enforce a previous prenuptial agreement. For ease of reading, we will refer to prenuptial agreements here.

Why do couples enter into pre-nuptial agreements?

In certain jurisdictions, prenuptial agreements are the norm. In others they are considered unusual, and frankly, unromantic! But there are good reasons for entering into an agreement these days in particular for wealthy families with an international lifestyle and a range of assets held globally hoping to ensure that this wealth stays with that party or his/her family:

  • To provide asset protection: protect family wealth from what has become an increasingly generous series of awards in favour of the weaker party and the vulnerability of inherited wealth, particularly in some common law jurisdictions. Where the wealth has been brought into the family solely by one party, and this could be for many reasons but including where one party is older and has successfully accumulated wealth by his own efforts or because a party has the benefit of family and inherited wealth. It is common for prenuptial agreements to ring fence premarital assets and allow for a fair distribution of only those assets which are accumulated during the marriage;
  • To simplify matters on divorce, create certainty and avoid lengthy and expensive litigation;
  • To protect the interests of children from a previous marriage;
  • Although traditionally seen as a tool for the wealthy, a prenup can also record and allow compensation to a party for giving up employment, or moving jurisdictions for the sake of the family.

How do the courts view prenuptial agreements?

There has been a significant change in attitude towards prenuptial agreements in recent years. Originally they were seen by the courts as a threat to the flexible jurisdiction which prevailed protecting the rights of the financially weaker spouse. In common law countries such as England and Hong Kong, family law has been designed to ensure a fair division of marital property, dependant on a number of different factors to determine who should get what in order to allow the parties to carry on with their lives as comfortably as possible after divorce. The trouble was, the outcome was unpredictable and could differ from one judge to another, depending on his exercise of his judicial discretion. If there was a prenuptial agreement is was just one of the factors the court would consider. Prenuptial agreements were seen as a tool of the wealthy to limit the rights of the weaker spouse by making her (traditionally) sign an agreement which would arrange that a certain amount would be payable dependant upon the number of years they were married, how many children they had and so on. However, with the increase in awards, particularly in common law jurisdictions, the perception of the prenuptial agreement has changed to one of prudent planning, so long as the rights of the weaker spouse and children are protected within the document.

Very recently in England, the Law Commission has recommended that there be a change in the legislation to make prenuptial agreements legally binding. This has been controversial as in many sectors of society, particularly the Church, prenuptial agreements are considered against public policy as they undermine the idea of marriage as a life long union. Now the papers are all reporting that DIY divorce will become all the rage as couples can write their own contracts before getting married which the courts will recognize as valid.

In reality, society has changed over the years and divorce has become commonplace. Consequently the courts have become more sympathetic to the parties’ wish to regulate their affairs in what is hoped to be a cost efficient way. In most jurisdictions, however, safeguards have been put in place to ensure that such agreements are fair, that financial responsibilities are met and they are not designed by the parties to defeat creditors. Some guidelines common to many jurisdictions are set out below.

Guidelines

Generally, a prenuptial agreement will be enforceable if:

  • Both parties have received independent legal advice – although this is not always fatal if a party was able to take legal advice but chose not to;
  • There has been full disclosure. It is important that each party has the information material to his or her decision and each party had intended that this agreement would govern the financial consequences of the marital breakdown;
  • There is no evidence of duress, fraud or misrepresentation which would in any event put a contract into question, but in addition to this, evidence of undue influence and other unworthy conduct, such as exploitation of a dominant position to secure an unfair advantage, may render the agreement unenforceable. It has been suggested that there should be at least 28 days between signing the agreement and the wedding to allow proper consideration of the implications of the agreement and to ensure that there is no question of pressure at the time of signing;
  • The agreement must be fair. If one party wishes to ring fence inherited or pre marital assets, it is as well to compensate the other party in the division of the post marital assets. If the marriage is long, inherited wealth, pre marital assets and trusts will all be more vulnerable to a claim. The law differs from one jurisdiction to the next in respect of premarital and inherited wealth but in England and Hong Kong the needs of both parties will be considered first. If there is any surplus for distribution, factors such as the duration of the marriage and whether the inherited or premarital wealth has been mingled and used by the parties in their general living expenses will be relevant. If so the funds will be vulnerable, even if there has been an attempt to ring fence that asset by, for example, putting it in a trust.
  • Special care should be taken to provide for children and the inclusion of a review clause is advisable as the contract may become less relevant over time.
  • Are nuptial agreements enforceable in all jurisdictions?
  • For the international client, it is important to know where prenuptial agreements will be enforceable. There is a tread, even where they are not enforceable, that they should be taken into account:
  • In most countries in Europe as well as the US and Russia, prenuptial agreements are strictly enforced and in China, they are enforceable under Article 19 of the Marriage Law;
  • In Canada, New Zealand and Australia they are binding generally. In Canada they are binding, so long as there has been independent legal advice and full disclosure. Further the courts can intervene if the provision for division of property is unfair. In Australia, prenuptial agreements are binding pursuant to Part VIIIA of the Family Law Act. In New Zealand, they are binding unless a court considers that letting the contract stand would cause ‘serious injustice’;
  • In England and Wales, following the 2010 Supreme Court case of Radmacher v Granatino, prenuptial agreements are enforceable, subject to certain conditions, and we await the outcome of the Law Commission’s report;
  • In Singapore, following the Court of Appeal case of TQ v TR, where, in addition to allowing the principle that a pre-nuptial agreement may be considered in a court’s determination of a fair result, it further held that foreign prenuptial agreements governed by foreign law will be given significant weight and would normally be enforceable;
  • In Hong Kong, prenuptial agreements are not enforceable per se, but the existence of such a contract will be a factor which will be taken into account in all the circumstances of the case.

Are nuptial agreements enforceable between jurisdictions?

It is material where the agreement has been finalised but it is more important where the case is heard. In Radmacher v Granatino, the case involved a prenuptial agreement which had been settled in Germany, between a German wife and a French husband with a German law clause. As the couple were resident in London at the time of the divorce, and the petition was issued there, the matter was determined by the English court. In Germany, the agreement would have been strictly enforced, in England, before its determination by the Supreme Court, it was not. The current disparity between jurisdictions can often give rise to a dispute over forum. The party in whose favour the prenuptial agreement has been made may well go to great lengths to establish that that country should hear the dispute as to financial division particularly where the contract is strictly enforced. At present, if the case is to be heard in England or Hong Kong, the outcome is less certain. A governing law clause may help in a forum dispute, but may not be determinative. If there is a forum dispute, the whereabouts of the assets will be material.

Conclusion

Given the prevalence of prenuptial agreements and the fact that in most jurisdictions they are enforceable, they are a useful tool for international wealthy families. They are regularly viewed as prudent wealth planning, along with the creation of family trusts. The fact that inherited wealth and trusts, which would normally be vulnerable to asset division upon divorce, particularly in England and Hong Kong, can be ring fenced with a prenuptial agreement is particularly attractive. However, even where such agreements are enforceable, care must be taken with the drafting as many agreements end up being litigated – the opposite of the parties’ intentions. There have been a string of high profile cases in Australia over the last few years. The idea of the ‘DIY prenup’ is therefore not an attractive thought and experts in the field should be consulted to avoid expensive court battles.