Popping the truly big question after they say yes
Howard Bilton Chairman of The Sovereign Group
Getting married is, or should be, one of the happiest days of anyone's life. But it is a sad fact of life that many marriages end in divorce. Frequently the divorce process involves an acrimonious split of assets, which leaves neither party happy and lawyers much enriched.
Prenuptial agreements can be an effective way of avoiding a lengthy battle over assets and are finding increasing favour. They typically detail exactly what each party is bringing into the marriage and what each party will take out of it in the event of a breakdown. They are generally binding and will be upheld by the courts as long as they have been negotiated with full disclosure of assets by each party.
'Prenups' can never be said to be a romantic way of cementing a relationship, but the negotiating process can reveal differences of opinion which might suggest incompatibility and make it unwise or impossible to marry. It might be useful to find out beforehand if that is the case. Indeed, in some countries it is not possible to get a marriage licence unless issues such as children, careers and finances have been discussed and agreed upon in some detail. Often partners get a nasty shock when fundamental differences on these matters come to light after the nuptials.
An alternative to negotiating what might be an embarrassing agreement prior to marriage would be for one or both partners to settle assets into trust.
Wealthy individuals frequently create trusts upon marriage to safeguard assets accumulated prior to marriage for future generations. Many are happy to look after an estranged spouse to some degree but do not particularly see why large sums should be awarded to the spouse from assets that were either inherited - and therefore might rightly be considered as family assets to be preserved for children and grandchildren - or from capital which was accumulated without the assistance of the spouse and prior to their meeting or marrying.
In simple terms, anything transferred to a trust is no longer the property of the transferor (settlor), so it cannot be included within his wealth for the purposes of paying a creditor, whether it is a business debtor or an estranged spouse. In practice, that argument only goes so far. Many matrimonial courts simply ignore the existence of the trust and award to the other side on the basis that assets held in trust could be available to the settlor if required in order to meet his financial obligations if he is unable to otherwise do so.
A creditor can force trustees who have received assets without paying for them to give them back if the settlor cannot pay his debts without those assets, i.e. the settler is bankrupt without those assets, and it can be shown that the transfer to the trustees was made with the intent to defeat a creditor or made within a certain time even if there was no intent. In Hong Kong, such legislation can be found in the Bankruptcy Ordinance (Chapter 6) sections 49-51 and also the Conveyancing and Property Ordinance (Chapter 219) section 61.
For this reason, many offshore jurisdictions have enacted asset protection trust legislation. The effect of this is to remove the uncertainties created by the above and similar onshore legislation and attempt to ensure that assets transferred into trust are safe from all forms of attack irrespective of timescale or motive, after the trustees have held those assets for a certain time.
The length of time before trust assets are safeguarded varies from jurisdiction to jurisdiction. The Cook Islands enacted very aggressive legislation that has the effect of requiring a legal action to overturn a gift into trust to be commenced within one year or face certain defeat. For the Cayman Islands, the period is six years. In Gibraltar, the law suggests that as long as the settlor was solvent at the time he made the trust and did not become insolvent as a result of the transfer into trust, the assets are safe.
The problem here is that the test of solvency requires consideration of assets minus liabilities at the time of transfer and includes contingent liabilities. Some may argue that if a person gets married or is considering marriage, he/she is taking on an asset - the spouse. Others may argue the marriage brings about a contingent liability because a divorce may result in the loss of up to 50 per cent of his/her assets in divorce proceedings. So if an asset transfer into trust is made in contemplation of marriage, perhaps it is impossible to safeguard more than half of his/her total wealth.
In any event, the offshore jurisdictions have gone to great lengths to ensure that trusts settled under their laws cannot be broken in the ordinary course of events, so assets contained within a trust remain safe from all forms of attack as long as these conditions are met irrespective of what the onshore legislation in the settlor's home country might say about this.
Trusts can have all sorts of additional benefits. In particular, they are useful in safeguarding assets for the children in circumstances where, due to either death or estrangement, a surviving spouse might gain entitlement to assets then remarry an avaricious spouse who might either waste or purloin wealth that was not intended to benefit those outside the immediate family of the settlor. Frequently the dynastic use of trusts is more important than any tax or asset protection advantages.
So prenuptial agreement or trust? Why not both? Some might argue why not neither. Those are the people who are generally spending a lot of their money employing lawyers to try and sort out one unholy mess. Take the embarrassment and the trouble now rather than the pain later.
His & hers
Prenups can be an effective way of avoiding a lengthy battle over assets. They typically detail exactly what each party is bringing into the marriage and what each party will take out of it in the event of a breakdown. They are generally binding and will be upheld by courts
An alternative to negotiating an embarrassing prenup would be to settle assets into trust. Trusts can protect your assets and safeguard them for the children by preventing them from misuse by an estranged spouse. The dynastic use of trusts is more important than any tax or asset protection advantages
Which is better? So,prenup or trust? Why not both? Take the embarrassment and the trouble now rather than the pain later