Anyone with substantial financial assets is obviously not going to be happy at the prospect of losing a large proportion of those assets in the course of divorce proceedings.
Protecting assets from any future divorce is therefore often uppermost in the mind of anyone who is significantly wealthier than their spouse, or potential spouse.
But there are right and wrong ways of going about protecting assets. Here we look at some of the ‘dos and don’ts’.
Do: Consider entering into a pre- or post-nuptial agreement
One of the best ways of protecting assets, particularly those acquired prior to the marriage, is to enter into a pre- or post-nuptial agreement with your spouse, specifying how assets should be divided in the event of a divorce.
Such nuptial agreements are not binding upon the divorce court, but the court will normally uphold an 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 the agreement.
Thus, if the parties had both made full disclosure of their means and had had an opportunity to seek legal advice before signing the agreement, and if there had been no undue pressure to sign it, then, assuming that the agreement was broadly fair, the court is likely to uphold it, unless there has been a significant change in circumstances since the agreement was signed. The couple having children may amount to such a change in circumstances.
Don’t: Spend money solely to prevent your spouse getting it
It can be tempting for the wealthier spouse to spend a significant proportion of their assets, simply to deny those assets to their spouse in any future divorce.
Of course, this will be successful if the assets are entirely dissipated, not if they have been converted into other types of assets.
But spending money in this way with the sole purpose of trying to defeat a spouse’s claim on divorce is unlikely to work.
For example, the court can simply add-back the money spent, by reattributing it to that party’s share of the assets, as we explained here in this post.
Do: Consider using a trust
Trusts are often used to protect family wealth, for example to ensure that the children of the settlor of the trust benefit from their wealth.
And this can have the effect of putting that part of the settlor’s wealth beyond the reach of the divorce court.
But this will only happen if it is a genuine trust, not merely a sham designed with the sole purpose of defeating, or reducing, a claim by the settlor’s spouse.
The divorce court will therefore investigate the trust, and if it considers it to be a sham it may treat the assets of the trust as the property of the settlor, meaning that they will be taken into account on the divorce.
Sometimes even a genuine trust drawn up shortly before the divorce may raise the suspicion of the court.
In order to avoid these pitfalls anyone considering using a trust to protect family wealth should seek expert legal advice.
Don’t: Try to hide assets
Perhaps the most obvious idea to protect assets on divorce is simply to hide them.
But this is not a good idea.
If the court becomes aware that a party has failed to disclose assets then it will of course require them to make full disclosure.
And if that party still fails to make full disclosure then the court can make adverse inferences about the assets that that party is hiding, thereby effectively bringing those assets into account on the settlement.
In addition, there are likely to be costs consequences for the party hiding the assets, with the court ordering them to pay, or contribute towards, the other party’s costs.
Do: Consider family loans
Money often passes between members of a family. In particular, parents will often provide financial support for their adult children.
Such payments can subsequently become assets involved in the recipient’s divorce proceedings.
A way to avoid this scenario is to specify that the payment is in the form of a repayable loan, such that it is actually counted as a debt by the divorce court.
But the court will only count it as a debt if it considers that the loan is indeed repayable, and not just a ‘soft loan’, which the lender does not necessarily expect to be repaid, and which they would certainly not enforce the loan to repay.
In order to demonstrate to the court that the loan is not a soft loan a written loan agreement should be drawn up, setting out the repayment terms. Obviously, such an agreement should ideally be prepared by lawyers.
Don’t: Transfer assets away
Lastly, don’t be tempted to transfer assets away to someone else, in an attempt to defeat or reduce your spouse’s claim on divorce.
If it is satisfied that the transfer was made, or is to be made, with the intention of defeating the claim then the court may make an order preventing the transfer, or setting it aside the transfer if it has already been made.
Where the transfer took place less than three years previously and had the effect of defeating the claim then the court will presume that the intention of the transfer was to defeat the claim.
If the transfer took place more than three years previously then the intent to defeat the claim must be proved, although it can be inferred from the circumstances, for example if it was made for less than the full value of the asset.
And once again there are likely to be costs consequences for any party found to have made a transfer, or to be attempting to make a transfer, with the intention of defeating a claim.