With so many high profile and celebrity divorces in the media spotlight, it’s hard to escape the discussions going on around us about pre-nuptial agreements, often known as pre-nups. Large settlements between household names bring to light the perils of marrying in haste without giving a thought to the consequences of marriage breakdown.
Whilst the lifestyles of the rich and the famous might seem a world away from your own, there are lessons to be learnt. A pre-nup can be a vital document to have entered into when it comes to negotiating a divorce settlement, no matter what your earnings might be. After landmark divorce cases in recent years, pre-nups are now much more likely to be upheld by a court when determining the outcome of divorce proceedings.
Small business owners and entrepreneurs in particular need to be aware of the effects marriage and divorce can have on their asset and income position. Pre-nups can be instrumental in protecting business interests as well as other assets built up before and after marriage.
Pre-nups are written agreements entered into by a couple before their marriage or civil partnership which detail what a couple wants to happen to their financial affairs in the event that the relationship breaks down.
Pre-nups are not legally binding in the UK. Following the landmark Supreme Court case of Radmacher v Granatino, the Court will now uphold a pre-nup unless to do so would be unfair. In considering whether it would be fair to hold a couple to a pre-nup the court will consider all of the circumstances including whether:
• The agreement was entered into freely by each party
• The parties had a full appreciation of the implications of the agreement at the time of signing it
• It provides for the needs of both of the parties and any children.
In the Radmacher case it was the wife who benefitted from a pre-nup. Mr Granatino was originally awarded over £5.5 million by the court; the Supreme Court found that insufficient weight had been given to a pre-nup entered into prior to the marriage and considered an award of £1 million fair in the circumstances.
With the gender pay gap falling to 9.6% in 2012 and marital roles changing dramatically in recent times, the case highlights that it may be just as beneficial for wives to protect their assets as it is for husbands.
With more husbands staying home to look after children whilst wives choose to return to work, it could soon be ex-husbands claiming maintenance and child support instead of the widely held stereotype of ex-wives laying claim to pay and pensions.
Divorce for an entrepreneur or business owner is a very complex matter. The starting point for a division of assets on divorce is that they should be shared equally. The court sees the contribution of the “bread winner” as no greater than the contribution of the “home maker” in the vast majority of cases. This means that even though your spouse may have had no direct influence or involvement in the business they could still be entitled to a share of your interest in a business, and in some cases 50%.
Complications arise as to how that share should be realised on divorce. It would only be in very exceptional cases that a court would order a business or shareholding to be sold. Usually the court would award other matrimonial capital to the spouse without the business interest to reflect the other’s share in that asset. A spouse may be ordered to raise capital through the business to buy out the other’s entitlement and accountants are often needed to advise on issues of liquidity and realisation. In some cases a spouse can be awarded shares in the business.
It can be difficult to understand why a business you’ve worked so hard to build up before and after a marriage should be shared. A pre-nup can set out that a business interest should be excluded from consideration on divorce, which may offer the best possibility of protecting your life’s work.
Others involved in your business may also feel more comfortable if you were to take out a pre-nup before marrying as it could minimise the impact on its operation in the event of a divorce.
Debt can have a significant impact on your financial position after divorce. It is important to be aware that you could be responsible for discharging debt accrued either in joint names, or even the sole name of your spouse, following a divorce.. This makes it particularly important to ensure that you do not run up costs unnecessarily in dealing with the divorce process.
The aim of the courts in resolving financial matters on divorce is to achieve fairness, so it will uphold a pre-nuptial agreement if it provides properly for the parties and any children of the family. They therefore represent an extremely important means of protecting assets, and in particular business interests. Seeking expert legal advice before entering into a pre-nuptial agreement is, however, essential to maximise the chance of it being upheld in court.
This helpful business advice was sponsored by Pannone LLP.