Prenuptial pact lets reality take over when romance fails

PUBLISHED : Sunday, 12 September, 2010, 12:00am
UPDATED : Sunday, 12 September, 2010, 12:00am

Tiger Woods' recent divorce has brought the issue of prenuptial agreements firmly into the spotlight. Rumoured to be worth more than US$2 billion, he is thought to have paid his now former wife 'only' US$100 million. And the reason is said to be a solid prenuptial agreement.

So, how good an idea are prenups? Certainly, negotiating agreements about what happens in a divorce when contemplating marriage can hardly be romantic but prenuptial agreements are not a new idea. They have been around for hundreds of years.

During the 19th century in the United States, before the Married Women's Property Act of 1848, women almost always sought a prenuptial agreement because, prior to that law, everything a woman owned or inherited was automatically transferred to her husband and if he died or divorced her, she could lose everything.

Nowadays, prenups are more often used by the rich to protect wealth. That is not their only use, though. A standard prenup can contain many non-financial provisions. Detractors say they encourage bad behaviour by limiting the punishment if someone behaves unreasonably, commits adultery or gives the spouse other grounds for divorce, and think these matters should be left to the courts.

Those in favour argue that prenups encourage marriage, as wealthy individuals are more likely to marry if they can get protection, and couples should be allowed to contract in any way that they wish.

Marriage is often described as a contract. In any commercial relationship, it is wise to prepare a written agreement so that there is no misunderstanding and there is a document to refer to should there be a dispute or a breakdown of the relationship. Why should marriage be any different?

If two people form a company, it is advisable and commonplace to sign a shareholders' agreement. Often the negotiating process reveals differences that would make it impossible for the business to function in the long term anyway. The same can happen when negotiating a prenup.

Typically prenups deal with the division of property on divorce; what will happen to the marital home; ownership of assets; maintenance for the poorer spouse and for the children; custody arrangements for the children and visitation rights; schooling, religion and other matters pertaining to the upbringing of children.

Having everything laid out in writing in advance should speed up a divorce and help avoid rancour in the unhappy event of a marriage failing. So on the face of it, a prenup would seem like a good idea for all parties. But is it enforceable?

It depends on the country in question. There is now an important case before the British courts. Katrin Radmacher, a 40-year-old paper-industry heiress with a fortune estimated at US$80 million, is divorcing investment banker Nicolas Granatino, who she married in 1998 and with whom she had two children.

He was awarded GBP6 million (HK$71.8 million) but she appealed, citing a prenuptial agreement in which he undertook to make no claim on her assets in the event of divorce. The court sided with her and slashed his settlement, but has now given leave for the case to be referred to the Supreme Court. We await their verdict with interest.

British court cases are not binding on Hong Kong courts but are highly persuasive. This was reiterated by a judge in the recent Hong Kong case of DD v LKW, which confirmed that the starting point for divorce settlements in the city was now equality of division and no longer reasonable requirements. The court was much persuaded by the White case, one of the recent British cases that helped establish this equality principle.

Up until now, prenups in Britain have been 'very persuasive and should be given decisive weight' but are not necessarily binding. The Radmacher case may change this. If so, we can be fairly sure that the Hong Kong courts will follow.

In Australia, Canada, China, Thailand, the US and most European countries, prenups are legally binding. It is really only in Britain and other jurisdictions that follow the British common law system where there is doubt.

An alternative to a prenup is to put assets into a trust. But the courts are increasingly treating trust assets as a resource to which the settlor (the person who transfers the assets to the trust) could have recourse and therefore including them in his or her net wealth.

This should not be the case if the settlor is not, and has never been, a beneficiary and the trust was properly set up prior to marriage and the settlor can show that he or she cannot and has not benefited. In those cases, the family courts should treat the trust assets as not belonging to the settlor, because they don't, and therefore should not take those assets into consideration when dividing the family property.

So trusts give greater protection and certainty than a prenup, at least until the Radmacher case is concluded. But what is clear is that a rich spouse can't possibly be worse off with a prenup. So why not set up the trust AND the prenup? Alternatively, don't get married. Or if you do, be very, very nice.