The Indian “joint family” and the challenges of protecting family wealth on divorce

The “joint family” is a concept which most Indians will be familiar with, even those growing up in a less traditional family set up in England. In India, it is seen as the most desirable set up for families as a way to retain wealth and working together. The history of the “joint family” goes back to a time where intensive labour and the division of the work was desirable and a means of achieving economic stability. It also emphasised the importance of families and the patriarchal bond where the head of the family made decisions for the wider good.
 

This set up is still prevalent within modern Indian families living in the UK. Whilst at times culture plays a part, the difficulties of getting onto the housing ladder sees many newly married couples living with the parents, working within the family business and intertwining their individual and family wealth without much regard to legal ownership.  In my experience as a divorce lawyer and with my Indian background, many joint families distribute and share assets in order to ensure that everyone’s needs are met as and when they arise whilst having a keen eye on the most tax efficient way in which to operate. However, this concept of ‘sharing as needed’ can place the family wealth under significant risk of attack upon divorce and create unnecessary (and often costly) complexity and financial uncertainty at an already difficult time.

How the courts in England and Wales divide assets on divorce

When determining the division of assets following a divorce, the courts in England and Wales do look beyond the assets held legally by one party. The court can examine the resources of the wider family members if assets owned within the family unit have been a resource to one or both of the spouses or if the legal ownership does not reflect the understanding or agreement between family members.

In the case of Gadhavi v Gadhavi (2015), there was ample evidence which allowed the Judge to conclude that as the eldest son, the husband was the head of the family and as such a property in India, which was originally in his father’s name and then inherited by his mother, was an asset available to him and the court therefore took it into consideration when dividing the assets between the parties. 

Ways of protecting Indian family wealth in the event of divorce

In an era where divorce amongst the Indian community is on the increase, it is important to plan ahead and protect beyond wealth preservation and consider the impact that a divorce could have on the family wealth and the joint living arrangements.

Some of the legal tools I often suggest and discuss with my clients include:

• Prenuptial and postnuptial agreements - whilst these agreements are not legally binding in England, they do form one of the circumstances of the case which the court will take into consideration. Of particular value to the “joint family” is that a nuptial agreement provides significant evidence on the issue of ownership at the time of the marriage. If one spouse has use of a joint family asset but the understanding is that the ultimate owner of the asset is the head of the family or a particular group within the family, this should be recorded.
  
  Furthermore, if conditions are to be placed on use of an asset or involvement within a family business, subject to rules governing entitlement under partnership and company law, this should be clearly recorded in the agreement.  Informal arrangements create real difficulties upon divorce which can require considerable evidence from members of the family who may also need their own legal representation – all adding to the costs to be borne by the joint family. It is also possible to enter into a postnuptial agreement if the marriage has already taken place.
   
• A Declaration of Trust - this records the beneficial owners of a property where this is different to the legal owner. These agreements can be as complex as you wish and can cover everything from occupation of a property to who pays the mortgage, the interest that each party has in the property and how the cost of renovation will be divided. These are invaluable in the context of divorce and will be binding on all parties absent duress or fraud. However, the English courts have a wide discretion and are able to transfer the husband’s interest to the wife where needs dictate.
   
• Trust structures - a family trust can be tax efficient but can also preserve wealth for future generations as the “settlor” can set out the terms of the trust including the beneficiaries’ entitlement – i.e. are they entitled to income and/or capital from the trust. It should be noted that the English courts can make orders which forces the trustees to provide disclosure and in some circumstances even force their hand into making distributions to the divorcing member of the family. It is therefore important that legal advice is taken from both a trust lawyer and divorce lawyer when setting up the trust and to be aware that the trust can still be deemed a resource available to the divorcing family member.
   
• Companies - ownership of assets within the joint family can be regulated via a corporate entity. The shareholdings can be clearly allocated to the individuals subject to their entitlement with income distributed depending on the class of shareholding. It is important to retain minutes of company meetings and if action is taken to transfer shareholdings and/or company assets from one party to another, the reason for the transfer and any consideration paid is recorded clearly. This provides useful evidence on the question of the true beneficiary (i.e. owner) of the asset in dispute.  Again, in the context of a divorce, the courts have significant powers in forcing disclosure to ascertain the true owners of a company or corporate structure. If the divorcing family member is found to be the beneficial owner of the company (even where the shareholdings show to the contrary), if needs dictate, the court can transfer the assets to the other spouse.

If separation of a family member is imminent, it is vital to seek urgent legal advice.  Even in the absence of a prenuptial agreement and trusts, it is still possible to protect the joint family assets. Careful consideration should be given, however, on whether a divorce in India is possible, where the settlement is unlikely to be as generous to the weaker financial party as in England and Wales and where the court’s powers for disclosure are limited.

Further information

If you have any questions about ways of protecting “joint family” wealth, please contact Sital Fontenelle or a member of our family and divorce team. Alternatively, click here to get started online and find out where you stand. 

We have a wealth of experience in advising Indian families on relationship breakdown and can draw on the experience from experts in our private client and corporate & commercial teams as well as finance professionals and overseas lawyers to ensure you receive comprehensive and strategic advice.

About the author

Sital Fontenelle is a partner in Kingsley Napley’s family team, where she specialises in complex financial matters within a divorce, including international jurisdictional cases, negotiating and drafting  prenuptial and postnuptial agreements as well as every aspect of private children law cases.

Sital’s areas of practice include all aspects of private family work, with particular expertise in financial remedy proceedings often involving an international dimension, with a particular expertise in advising families of an Indian background. Sital has extensive experience in complex cases involving off-shore trusts, family businesses, tracing assets and inherited wealth.