IMPORTANT: This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. Release Date: 10 March 2009

Briefings

In an ideal world, the end of a marriage would lead to a financial clean break between a couple. The reality is often far less straightforward and, despite the publicity received by divorce cases involving substantial assets, clean break cases are very much the exception.

However, for high net worth individuals, finality can be achieved either by reallocating assets to meet the receiving spouse's need for accommodation and income (in short marriage cases) or by dividing the family's wealth to reflect the couple's respective contributions to the marriage (in longer marriages).

It is the latter approach that often gives rise to emotional issues and therefore litigation. This is particularly true where one of the spouses has generated significant wealth during the course of the marriage or where the matrimonial assets substantially comprise inheritances or assets settled on trust.

Two recent court decisions have shed some light on the approaches that high net worth individuals can take to preserve their own and generationally acquired assets from assault in the event of divorce.

MacLeod v MacLeod

On 17 December 2008, Her Majesty’s Privy Council gave its much-anticipated decision in the case of MacLeod v MacLeod, which has now become the leading case on both ‘pre-nuptial’ and ‘post-nuptial’ agreements.

In the judgment, the Privy Council reviewed the law on the validity and effect of separation and maintenance agreements and concluded that it was not open to them to reverse the long standing rule that pre-nuptial agreements are contrary to public policy and therefore not valid or binding in the contractual sense.

This does not mean that pre-nuptial agreements are totally worthless for would-be spouses who wish to ring-fence inherited wealth or to limit the quantum of a lump sum to be paid on divorce. They still constitute a factor to which a Court will have regard; but Court is not bound to make an order in identical (or even similar) terms. 

However, the Privy Council held that post-nuptial agreements are very different from pre-nuptial agreements. By the time a post-nuptial agreement is negotiated and executed, the couple is married and the agreement is no longer the price which one party may extract for his or her willingness to marry. Therefore there is nothing to stop a married couple entering into contractual financial arrangements which the court will uphold.

Couples who sign pre-nuptial agreements should therefore also be advised to make a post-nuptial agreements after the marriage has taken place (on the basis that following MacLeod post-nuptial contracts are binding and can only be varied by the court in limited circumstances). Resigning the original will not be sufficient, parties wishing to ‘validate’ pre-nuptial agreements after the marriage should do so on a different piece of paper.

What if a spouse subsequently refuses to ‘validate’ the pre-nup? The likelihood is that were the refusal to lead to divorce then the pre-nuptial agreement would be a factor of ‘magnetic importance’ to which a court would give significant weight.

Mubarak v Mubarik

A few months before the Privy Council ruled in MacLeod, the Royal Court in Jersey released its judgment in a case which has significant ramifications for English divorces where the marital assets include interests in off-shore Trusts.

Mubarak highlighted the tension between English divorce courts and offshore jurisdictions applying Trust law. In the case of the former, the role of the court is to do justice between the spouses. As for the latter, the court’s role is to make or approve decisions in the interests of the beneficiaries.

Historically, the English courts had often made orders which impinged on the administration of offshore Trusts for the benefit of one of the parties to the marriage. The courts of Jersey had, by and large, given effect to these orders.

However, in October 2006, Article 9 of the Trusts (Jersey) Law 1984 was amended to provide that no foreign judgment relating to a Trust shall be enforceable to the extent that it is inconsistent with the applicable law relating to the Trust.

In Mubarak the court was faced with interpreting these provisions and differentiated between an overseas court making an order that alters a Trust and one which varies a Trust.

An alteration is an order which is outside of the powers of the Trustees, for example making an excluded person a beneficiary. Such an order is unenforceable.

A variation, for example an order that a lump sum is paid to someone who is a beneficiary, is enforceable. Albeit whether to enforce is in the ultimate discretion of the court and subject to the interests of the other beneficiaries.

Although Mubarak is a Jersey case, the decision is likely to be relied on in other offshore tax havens.

The best advice for high net worth spouses and or parents wishing to preserve generational assets is therefore to settle assets on Trust and either exclude spouses (or the spouses of their children) from the outset, when the deed of Trust is drafted or, where a spouse is to be a beneficiary, ensure he/she can be irrevocably removed by the settlor.

For further information, please contact one of our Family group Partners - Sandra Davis, Melissa Lesson, David Lister or Barbara Reeves.