Asset Protection During Divorce

She looks simply stunning in her brilliant white wedding dress. You look deep into her eyes, welling up, overwhelmed by the moment as the vicar asks, “Do you take Maria to be your wedded wife, to share your life openly, standing with her, in sickness and in health, in joy and in sorrow, in hardship and in ease, to cherish and to love, so long as you both shall live?”

“I do,” you reply as a tear threatens to burst free.

In that instant, love, companionship, cocktail parties as a couple, dreams of a family, kids, private schools, the dream home all flash by.

Or so you thought.

The Office of National Statistics estimates 42% of all marriages end in divorce. Half of these are expected to occur in the first decade of marriage.

Nobody enters a marriage expecting a divorce, but a large number will, unfortunately, wind up that way.

Heartache, shattered dreams, split families and… a gargantuan claim on your assets follow.  This can often assume the form of a forced sale of the family home, division of your business, reallocation of your shares, splitting of your pension, properties and other assets. Your life’s earning bifurcated, 50/50, all after a three year marriage.

The infamous Section 25 of the Matrimonial Causes Act 1973 is a good place to start as statute establishes that courts have a large decree of discretion and flexibility in deciding how to divide assets. It states, “The court shall in particular have regard to the following matters—

(a)the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future, including in the case of earning capacity any increase in that capacity which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire;
(b)the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
(c)the standard of living enjoyed by the family before the breakdown of the marriage;
(d)the age of each party to the marriage and the duration of the marriage;
(e)any physical or mental disability of either of the parties to the marriage;
(f)the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family;
(g)the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it;
(h) in the case of proceedings for divorce or nullity of marriage, the value to each of the parties to the marriage of any benefit  which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring.”

50-50 Split of Assets

As for case law, as Nigel Shepard, a partner at Mills & Reeve said:

“There a broad starting point of 50:50…”

This is based on White v White [2000] where Lord Nicholls stated,

“…In seeking to achieve a fair outcome, there is no place for discrimination between husband and wife and their respective roles. Typically, a husband and wife share the activities of earning money, running their home and caring for their children. Traditionally, the husband earned the money, and the wife looked after the home and the children…whatever the division of labour chosen by the husband and wife, or forced upon them by circumstances, fairness requires that this should not prejudice or advantage either party when considering paragraph (f), relating to the parties’ contributions

The court will identify and value all assets then divide them “fairly”. The fact that you are a partner in a hedge fund earning north of £50 million and your wife a homemaker will not make a terrible amount of difference due to the above.  Even when the husband’s astute business acumen made a stellar contribution to the marital wealth, assessed at £131 million and the wife remained a homemaker throughout the 25 year marriage (in Charman V Charman [2007]) the judge awarded the wife 37% of the pot – £48 million. Even with a childless, short 3-year marriage a city fund manager was ordered to make a multi-million pay out.

With this backdrop, many men (and yes it is mainly men) have established trusts as an asset protection mechanism. These trusts may be located in an offshore jurisdiction in an attempt to protect them from the jurisdiction of English courts. But are these effective asset protection mechanisms? To further boost the protection, some of our readers have informed us they establish discretionary trusts – a trust under which no beneficiary has an automatic right to the trust’s capital or income as the trustees are vested with the power to allocate the resources.

The question is: do discretionary trusts constitute an effective asset protection body in the event of a divorce?

The answer to this is: it depends. There is no automatic protection vested in the entity as the courts will look beyond the artificial devices to establish the reality. In Prest v Petrodel Resources [2013] Rimer LJ stated:

“If property held by a husband has been put into the name of someone who, on the evidence, is obviously a bare trustee for him, there will be no problem in holding that the beneficial ownership has not changed…the court will also not be bamboozled by the use by husbands to a like end of “shams, artificial devices and similar contrivances”.”

Some of the factors the courts will consider are:

  • Who established the trust, when, and for what purpose?
  • The trustees’ policy. Did the trustees exercise genuine discretion or did they merely forward the funds in response to the beneficiary’s request?
  • The frequency of payment to the spouse/beneficiary by the trust.
  • The trustees’ stated intention as to their future exercising of discretion.

The court will arrive at its independent opinion regarding the trustees’ answers. The court can, and does at times, dismiss their stated word when it considers it incredulous.

Where answers are not forthcoming from such trusts, the court will arrive at its own judgement regarding the level of genuine discretion and the value of the trust: ‘if the trustees have refused to participate meaningfully or helpfully in the inquiry then neither they nor the beneficiary can complain if the court draws robust conclusions as to the likelihood of future benefit’.

What of the offshore dynamic? Surely an offshore, say Panamanian, trust is safe from the jurisdiction of an English court? Unfortunately (or fortunately, depending on your viewpoint) while any English court’s order would likely be unenforceable in the offshore jurisdiction, as BJ v MJ [2011] shows, the court will not hesitate to order the offshore trust to release assets and in the event of non-compliance, the court has the option to take from UK assets.

A genuinely discretionary trust should provide protection but this would entail significant loss of control of one’s assets.

How to Protect Assets?

There is no silver bullet as the family court as section 25 of the Matrimonial Causes Act 1973 gives wide ranging powers to the court. However, ante- and post-nuptial agreements now are recognised by courts albeit with the qualification that the must be “fair”. The Supreme court found that:

“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.

The Supreme Court then declined to precisely define “fair” but did circumscribe the scope by offering guidelines.

 

So where does this leave high net worth individuals? The take away points are: invest in a “fair” prenuptial agreement and consider establishing a bona fide discretionary trust. Needless to state, a lot will depend on your individual circumstances and expert legal advice must be sought.

It is often argued that one of the unintended consequences of the 50:50 split principle derived from White V White is the decline in couples opting to marry and the commensurate increase in unprotected couples “living as married”. But marriage as an institution survives, not lease due to perceived differing societal perceptions of married and unmarried couples. Introducing your girlfriend at a cocktail party doesn’t quite have the same ring and sense of permanence as wife.

But the direction of travel remains towards extending spousal marital rights to couples “living as married”.

 

 

Photo credit to Billie Grace Ward on Flickr (CC by 2.0)

 

 

One thought on “Asset Protection During Divorce

  • March 1, 2017 at 10:17 pm
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    Really informative. Seriously depressing, though. How can a 50-50 split be fair when I work my a!!! off and the other half is a kept women?

    Reply

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