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Gold diggers and gigolos

Date: 02 Nov 2007

Citywealth

Although money can’t buy love the reality of modern stresses and strains are that even those planning a lifetime with a beloved partner may not get past the first year before divorcing. In a world where your children are likely to be very well educated, how does the modern parent counsel children about marriage, pre-nups, divorce and losing part of the family business perhaps to a gold digger or gigolo? Although pre-nups and trusts are entirely sensible, the very mention could stir up resentment or divide a family.

According to the press, pre-nups are the ‘new black’, although they seem a relatively new phenomenon in Europe. There are three types: a pre-nup which is a contract between two individuals to create understanding about what will happen to their assets in the case of divorce. Then there is a mid-nup which is a regular review of the pre-nup and is required every five years or so or if children come along. A mid-nup will test validity and keep the pre-nup from being thrown out of court. The third form is pre-cip which is essentially a pre-nup used for same sex marriages. In the UK pre-nups are not legally binding but they are being increasingly viewed as an essential part of marriage commitment as judges favour parties using them and matrimonial settlements tend to be smaller.

North America is usually ahead of the curve on wealth and social issues, so I asked legal adviser, Warren Whitaker who is a Partner at four hundred lawyer firm, Day Pitney in New York for his advice. Whitaker who works with multi billionaire families on the issue of children and pre-nups comments “I think the biggest mistake parents make when their child is approaching marriage is to push them into a pre-nuptial agreement against his or her wishes. Parents should keep in mind that initial concerns about a partner usually soften when grandchildren arrive a few years later.” Whitaker advises his clients to be very careful particularly in a first marriage. He explains why: “I would encourage parents to look at their own estate plan rather than insisting on a pre-nup for children. Usually the parents have the money, not the child. The use of trusts is a viable way to pass benefits to the child whilst protecting certain assets from a spouse.”

Although trusts are an acknowledged global ‘vehicle’ for the transfer of wealth to children, they’ve come under scrutiny in the UK by the government in the last year, which has reduced the tax benefits for inheritance purposes. In addition one famous case, Charman v Charman has brought trusts sharply into the limelight and shown that they are not immune to the courts gaze when settlements are being decided. Judges will rule any day now on whether the ¬£68million trust in question should be divided up.

The details of the court case are that Mrs Charman, who is Chairman of her local bench says the trust (Dragon) should be included in their final divorce settlement. Mr Charman disagrees and wants the trust ‘ring-fenced’ away from the main divorce because he says it was set up as a ‘dynastic’ trust, simply to give money to future, unborn children. However none of the documents in the case show that the trust was set up for this reason despite being handled by professional offshore trustees and legal advisers. It has gone to the Court of Appeal for final ruling. If the Court of Appeal agrees with the High Court that the Dragon trust was not set up as a dynastic trust it is likely to increase Mrs Charman’s settlement.

Following this and other recent UK legal precidents advice to parents and their children considering marriage is ‘get a pre-nup’ says Richard Moyse who is a long established Partner at private client law firm Boodle Hatfield. Boodle Hatfield work for a number of wealthy individuals in the UK. Moyse says “in general there is trepidation about court orders coming out in Britain including the Charman v Charman case. If Mrs Charman’s settlement rises to forty five or even fifty percent, the topic of pre-nups will become more important. They will be needed to protect families from losing substantial portions of wealth in contested divorce settlements.”

Moyse confirms the current British legal view on pre-nups, saying “pre-nups are not legally binding but they are influential particularly in a short marriage and if there are no children, they can be highly persuasive.” He adds a warning, explaining “there has to be full financial disclosure; prior independent legal advice for both parties and courts say a pre-nup must be fair even when the parties divorce. As well as this it should include proper financial provision for children.”

Moyse continues explaining that the content of a pre-nup, depends on each individual, saying “there is no standard document as such. Although quite often you can exclude specific property (for example inherited property), this does not apply generally to the matrimonial home. It must include full disclosure from all parties and make a record of what will happen when the marriage breaks down. It must also provide for the less well off partner and children. Finally there should be a review or mid-nup within five years and an automatic review if a child is born or adopted by the couple.”

Moyse says there are also views about whether you should include a specific law clause on where the couple will divorce. He cites the interesting case of Ella v Ella, an Israeli couple who had a pre-nup in Israel governed by Israeli law but decided to live in the UK. The English Court felt that the pre-nup swung the vote in deciding that the divorce should be heard in Israel where the terms of the pre-nup would be likely to stick. In the UK Mrs Ella would have probably received a more favourable settlement.

Moyse says “it’s an interesting idea that couples decide at pre-nup stage where they will divorce. Where there are potentially competing jurisdictions, the first to serve divorce papers, may get the country of their choice. We assume in the Abramovich ¬£11bn divorce that he served divorce papers first because it was heard in Russia. The UK would have been more favourable for Irina.” Moyse adds “If couples are frequently moving abroad then pre-nups need to be regularly reviewed to take their changed circumstances into account.”

Moyse does understand that talking to children may be difficult and says “it is all a bit of a turn off for children but parents have to try and get across to them that fifty percent of their money or assets like a property or trust will just be taken away if things go wrong. Although it is very difficult to raise the topic, we have to advise families that they should tackle it. We have one wealthy client with a child who is shortly to get married who has asked me to write him a letter explaining the financial implications if the marriage breaks down that he can share with his child. He wants to have a sensible discussion.”

Sofie Hoffman who is also a solicitor at Boodle Hatfield offered an example of how a private family business could manage the process. She comments “suppose a son in his thirties is heir to the family business, you can see his family or the other shareholders wanting an undertaking by agreement that the business will not form part of his assets in divorce. In this case they could set up a ‘family charter’ which means the family and those involved with the business would fully understand all the issues involved with inheritance or divorce.”

So although America takes a cautious view, it is probably best in the UK to tackle the issue of pre-nups long before children turn up with a husband or wife on their arm. Hoffman adds a final comment “we strongly advise wealthy families to have pre-nups for children. Provided the pre-nup is properly drafted and the correct formalities have been followed.

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