You are facing a divorce, and you want to make sure that your business will survive and that you can protect your assets. Kevin Harris-James, head of our family law team, offers some practical advice and tips.
Divorce awards in England and Wales frequently run at an effective 50% of the marital assets. It is long overdue for the parties and for wealthy families to attempt to exert control over their assets and resources and so deal with each other fairly, harmoniously and with clarity.
This is the process known as divorce proofing – or attempting to introduce fair play and agreed approaches to the treatment of assets and property, without leaving it to a court to impose an outcome. That outcome may be against the consent, freely given, of an individual agreeing to financial commitments in a way which does not place the less wealthy party in hardship or real need.
All marital agreements remain subject to the supervisory jurisdiction of the family court. However, the court will uphold, and give effect to, fair agreements which are entered into in good faith. In this way, it is possible for wealthy families or individuals to establish clarity and exert control over an otherwise uncertain outcome.
Matrimonial property (or marital acquest) is the product of joint endeavour acquired during the relationship. The relationship can pre-date the date of marriage when cohabitation moves seamlessly into marriage. The general assumption is matrimonial property is shared – usually equally.
Non-matrimonial property is a term used to describe property that is acquired from resources external to the marriage (e.g. inheritance, lifetime gift, pre-marital wealth). Non-matrimonial property is far less likely to be to be shared on divorce.
Usually, non-matrimonial property can only be “invaded” where the matrimonial property is insufficient to meet the needs of the parties. There is no entitlement to share in the non-matrimonial property, but it is susceptible to a claim based on needs alone. It is crucial to try to keep the two types of property separate.
Pre-nuptial and post-nuptial agreements
A prenuptial agreement is a contract signed by both parties before their wedding that details what their property rights and expectations would be upon divorce. A well-drafted pre-nuptial agreement can ‘override’ any interference by the divorce court later – subject to the pre-nuptial agreement being seen as fair.
Having said that, pre-nuptial agreements can be rather tricky, so it is really important that they are well drafted. To strengthen them, each future spouse should be represented by his or her own solicitor. There are some important fundamentals:
• The nuptial agreement must be in writing
• It must be executed voluntarily and without coercion – preferably signed off no less than 21 days before the wedding
• There must be full disclosure (no hiding of assets)
• The agreement must be fair – so, a pre-nuptial agreement that says a spouse will never receive a penny will not stand the test of time. A pre-nuptial agreement that plans for financial entitlement as the marriage survives the test of time will be more likely to succeed.
By using pre-nuptial agreement, the parties can exercise individual and collective autonomy. They enter an agreement with their eyes wide open and decide in advance what property will be considered and treated as matrimonial property, and how it should be divided, and what property will be considered non-matrimonial property and so excluded from any consideration.
A pre-nuptial agreement is probably one of the best and least expensive ways of protecting your business against a future divorce.
But if you do not get a pre-nuptial agreement put in place, a post-nuptial agreement may be an option. It is similar to a prenuptial agreement except that it is, as the name implies, entered into and signed after marriage. In order to be valid, a post-nuptial agreement should contain the same vital elements as a pre-nuptial agreement.
Post nuptial agreements are particularly useful tools for legacy planning.
For example, I recently represented a wealthy business owner (aged 64) who had been advised to make a lifetime gift of circa £10m to his daughter as part of his inheritance tax planning, i.e. as a potentially exempt transfer (PET). The £10m took the form of the house in Chelsea where his daughter (aged 32) lived with her husband (aged 34), and their two-year-old child.
The business owner was anxious, given recurring problems his daughter was having with her husband; the couple had already had a brief trial separation before reconciling. The businessman’s worry was that if he gifted the £10m property to his daughter (as a PET), and she and her husband should then divorce, then the property would fall into the divorce and the husband might then claim a 50% interest.
I therefore advised the business owner that we insist the husband sign a post-nuptial agreement, whereby he waived any claim against the property in the event of divorce. I therefore drew up the post-nuptial agreement on behalf of the businessman’s daughter and then wrote to the husband. He consulted his solicitor who advised me that his client would not sign.
I then advised them that the property would therefore be sold, my client would purchase a property for about £1m and they would then live in that property. Funnily enough, upon realising he would no longer reside in a fabulous house in Chelsea, the husband quickly changed his mind and signed the post-nuptial agreement.
Three years later, he left his wife and tried to pursue a claim against the £10m property, despite the post-nuptial agreement. The divorce court rejected his claim and upheld the post-nuptial agreement.
Pre-nuptial agreements and post-nuptial agreements are a useful tool to protect wealth, particularly as money is passed down through the generations – whether by lifetime gift or inheritance.
Divorce-proofing your company
Partnership, shareholder and/or operating agreements should include various provisions that would protect the interests of the other owners if one of the owners gets divorced, including:
• A requirement that unmarried shareholders provide the company with a prenuptial agreement prior to marriage (or post-nuptial agreement if already married), along with a waiver by the owner’s future spouse of their future interest in the business.
• A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business.
Pay yourself a competitive salary
This point is often overlooked. If you do not pay yourself a competitive salary and instead reinvest everything back into the business, your soon-to-be-ex spouse might claim that they are entitled to more money or a larger percentage of your business because they did not derive any benefit, since all your money went back into the business instead of the household.
Think twice about Involving your spouse in your business – all or part of your business will probably be considered marital property. If your spouse was employed by you or your company, helped run the company in any way or even contributed business ideas during your marriage, they may be entitled to a substantial percentage of your business. The more involved in your business your spouse was, the bigger that percentage would be. If you have partners in your business, then your spouse would own a percentage of your share.