Preserving multi-generational family wealth on death and divorce
That decision brought about a seismic shift in the way that prenuptial agreements operate and are viewed in England and Wales and it is one that all financial advisers, as well as family lawyers, should be familiar with.
Earlier it is fair to say that there was pretty limited support for prenuptial agreements (prenups) here and their use was largely confined to international marriages between a UK and non-UK national.
In many European jurisdictions, not to mention most of the States in the US, they were used more commonly where the parties were about to marry because they were, and continue to be considered, determinative.
In England and Wales, however, prior to Radmacher while a judge would look at the terms of a prenup, it would be regarded as one of the factors to be taken into account when determining the case.
In general terms, the advice given to a couple before signing was that it would provide a good record of the parties’ respective finances and their intentions, but little more than that.
The Radmacher judgment shifted the position because it said that the parties will be held to their bargain in the event of a divorce, where the prenuptial agreement “was 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”.
This falls short of a situation whereby prenups are automatically enforceable but is still a hugely important judgment nevertheless.
As there is no requirement to register or enrol a prenuptial agreement with the court, it is difficult to say with any accuracy just how much their use has increased in the last 10 years.
Most family lawyers will agree that their use has proliferated, not just among the super-wealthy but by a growing number of couples wanting greater autonomy and more choice as to the arrangements which should prevail upon a division of their finances in the event of a divorce.
What is fascinating is the variety of approaches that the parties take on the subject: some go beyond what a court would do and would see as fair when dividing up the family wealth, whereas others want to keep everything entirely separate and apart now and for always and seem unable to contemplate what effect such an arrangement might have on any children who arrive and who will live ordinarily between the respective households of their divorced parents.
So just how far can a prenuptial agreement go in moving the needle away from what a court would award, in terms of capital and income provision, on divorce? The answer is: quite some way.
As a rule of thumb, divorce courts still typically prescribe a 50/50 split of assets generated during a marriage and can penetrate family trusts and inherited wealth too.
Now it is possible to ringfence, for example, a family business or a certain property or investment, even a prized pension pot, should both parties agree to that in advance and providing the tests in Radmacher are met.
Radmacher says that the parties should be held to their bargain “unless in the circumstances prevailing it would not be fair to hold the parties to the agreement”.
Such circumstances are likely to arise if the effect of the prenup is to leave one party in a “predicament of real need”. This is on the basis that the parties cannot have intended that would be the outcome when the agreement was signed.
So what exactly is a “predicament of real need”? Unsurprisingly, it is not defined because each case will differ and is unique in terms of the asset and income levels.
The golden rule when negotiating any prenup is that it must not try to contract out of any obligation to provide financially for the children.
So the spouse who wants to keep everything including any income separate – both pre and post the marriage – will need careful advice to ensure that provision is made for the children, for example, by way of support for general maintenance, the provision of school fees, child care costs, even if unquantified at the time the prenup is signed.
The focus then moves to meeting the need for housing and income for the financially weaker spouse. It can be pitched very low, in some instances just above the level of state benefits but the risk is that the court will feel that the spouse is dangerously close to falling into a “predicament of real need”, opening the way for more generous provision to be substituted.
It is much better to protect the wealthier party against the risk that the court will “interfere” subsequently by adding in a more generous margin at the time the prenup is signed.
The key to drafting a good prenuptial agreement is to find out what the parties want at the outset. Where is the momentum coming from to have one in the first place? Does it come from a parent/family trustees – as was the case in Radmacher – to protect family money, making it clear that without a signed prenup before the marriage the child/family member will not receive any further part of the family wealth?
Or is it to protect a particular asset, such as a business built up by previous generations of the family? Or has one or both of the parties been married before and does there remain an obligation to be fulfilled, such as the cost of paying for private and/or tertiary education for any children of a previous marriage/relationship?
It should be possible to accommodate these objectives, whilst at the same time defining the provision to be made so that it avoids falling into the “predicament of real need” category.
It need not provide actual figures but can say, for example, that only if a combination of any separate property retained by a spouse, together with his or her share of marital property built up during the marriage, is insufficient to provide for their housing needs, will a contribution from the wealthier spouse be forthcoming.
As mentioned above, no matter how deft the drafting of the prenuptial agreement or however creative its provisions, such contracts are not enforceable automatically or binding on the courts in England and Wales.
Unlike their commercial counterparts, only a judge can uphold its terms or, if finding that its effect is not fair, substitute different provisions to achieve fairness. Even then, the revised provisions may still be a long way short of the award that would be made on divorce without a prenuptial agreement.
It was not that long ago that prenups were disregarded by the courts entirely on the grounds of public policy. They were seen as undermining the institution of marriage itself.
We seem to be out of step with many European jurisdictions and States in the US in refusing to uphold prenuptial agreements and that may be because the United Kingdom has no written Constitution or Bill of Rights that enshrine basic rights, such as the right to have contractual relations upheld.
Many would say that our law affords a fairer and more flexible approach when trying to regulate the most personal of all human relationships. The downside is that it can make the outcome of any judicial review, as to the terms of the prenuptial agreement, at times, unpredictable.
Take the recent case of KA v MA (Prenuptial agreement – Needs)  EWHC 499 (Fam) where the husband and wife signed a prenup some three weeks before their wedding in December 2008.
The husband argued that its implementation would result in an award to the wife of £1.6m, whereas she put forward her claims, on a needs basis, at £6m. The judge did not accept that the husband had tried to exploit his dominant position (as the wealthier party) or apply duress in making it clear to the wife that without the prenuptial agreement he would not marry.
Both parties had been married previously and were described by the Judge as “mature, consenting adults”.
The judge considered carefully the parties’ respective evidence as to the wife’s housing and income needs. She assessed the former in the global sum of £1.35m and the income needs were to be met out of a fund of just under £1.6m. So the husband had to pay the wife a lump sum of £2.73m allowing for the fact that she had assets of her own of approximately £200,000.
However, that still left the husband with an asset base of just over £20m, so notwithstanding the stress and expense of a fully contested trial, the bulk of his wealth remained intact and more so than would have been the case had there been no prenup at all.
In conclusion, the increasing use of pre-nuptial agreements in England and Wales is largely down to the Radmacher case a decade ago.
Divorces are now frequently coming through where parties are seeking to uphold the terms of the prenup entered into and providing the tests of Radmacher have been adhered to, these contracts can be an effective way of cutting short litigation relating to the financial aspects of a divorce and moreover, to protect a party’s stronger financial position in many instances.
This blog was originally published in the FT Adviser on 5 October 2020.
If you have any questions about the issues covered in this blog, please contact a member of our team of family and divorce lawyers or click here to get started online and find out where you stand.
Jane Keir is a partner in the family and divorce team. She acts for equal numbers of men and women and many of her clients come from across the country and abroad, as well as London. Much of her work involves an international element and she works with other lawyers, accountants, actuaries, financial advisers, wealth managers and investigators in order to provide a thorough and comprehensive service to her clients. Among other recently reported cases, she acted for the successful wife in RC v JC, a landmark compensation case, and she represented the successful party in protecting the wider family’s wealth in the case of Daga v Bangur.
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