Crumbs of Comfort? The Decisions in the Miller and McFarlane Cases

Emma Hatley Withers Partner 2 June 2006

Crumbs of Comfort?  The Decisions in the Miller and McFarlane Cases

Last week the Law Lords heralded a new approach for the fair division of assets on divorce in the UK. The implications of the judgments in ...

Last week the Law Lords heralded a new approach for the fair division of assets on divorce in the UK. The implications of the judgments in Miller and McFarlane, both “big money” cases, will resonate in divorces across the country and be of particular concern to individuals where their wealth exceeds the needs of the family. The Facts In McFarlane the wife sacrificed a professional career to raise the family. The husband was a successful City accountant. After a marriage of 16 years they agreed an equal split of their £3 million ($5.6 million) capital but could not agree how to share the husband’s future income. Miller concerned a short childless marriage. The wealth of the husband had increased significantly, by more than £15 million, during the marriage of less than 3 years. The Results In McFarlane, the court allowed the appeal and reinstated a maintenance account to Mrs McFarlane of £250,000 pa for the rest of her life or until her remarriage. This equates to a third of her husband’s net income and vastly exceeded her annual budget of £120,000. The appeal in Miller was dismissed and the “clean-break” award of £5 million upheld although the reasoning of the lower courts was criticized in introducing the concept of “legitimate expectation” and attributing blame to Mr Miller for the breakdown of the marriage. This has allayed fears that the courts would be required to rummage around the attic of the marriage looking to cast fault in an effort to enhance the financial claim of the other spouse. Compensation To achieve fairness (after needs have been met) the court is now required to consider the new concept of compensation. The objective is to redress any significant economic disparity between the spouses arising from the way the marriage has been conducted. Mrs McFarlane’s award was intended to compensate her not only for the diminution in her own career prospects (she was a City solicitor) but also for the loss of a share in her husband’s enhanced earning capacity. But what does this mean for other spouses who may not have sacrificed a highly remunerated career? Little guidance is given as to when a claim to compensation will arise and how it is to be quantified. The position is fraught with problems. Is maintenance the appropriate vehicle to award compensation given that it automatically terminates on the receiving spouse’s remarriage? Will maintenance that is to be enhanced by an element of compensation put the prospect of a clean break beyond reach? The uncertainty creates scope for further litigation. Right to Share As a partnership of equals both spouses are entitled to share the financial fruits of the relationship, unless there is good reason not to. The so called “right to share” is applicable to all marriages, regardless of duration. To that extent the Law Lords were in agreement but whilst it was a unanimous decision, they did not speak with one voice. There is disagreement as to which assets are to be considered “fruits of the partnership” or the marital acquest and it is this discrepancy that may bring crumbs of comfort to wealthy individuals. Lord Nicholls states that the “yardstick of equality” is to be applied to all property acquired during the marriage otherwise than by inheritance or gift. The matrimonial home should normally be treated as part of the marital acquest. Non-matrimonial property is not the product of the parties’ common endeavour. It is property the parties bring with them into the marriage or acquire by inheritance or gift during the marriage. There is to be flexibility to differentiate between those two types of property. After a long marriage the right to share may also apply to non-matrimonial property if it has been merged into the marital acquest but it represents an unmatched contribution by one of the spouses. Over time the weight to be attached to that contribution may diminish, but in short marriages the yardstick of equality is unlikely to apply. Whilst Baroness Hale adopts a similar description of non-matrimonial property, she distinguishes between two classes of matrimonial asset. There are “family” assets intended for the use and benefit of the whole family such as homes, furniture and joint savings or a joint venture in which both spouses work. The yardstick of equality is to be applied to such assets to give full effect to the sharing entitlement. Other assets acquired during the marriage that have been generated solely or mainly by the efforts of one party (such as business or investment assets) are described as non-family matrimonial assets. She suggests that the yardstick of equality is to be applied less readily to these assets, particularly after a short marriage. Both Lord Mance and Baroness Hale indicated that yet a different treatment should be applied to dual career marriages irrespective of their length, as it may be wrong to apply the yardstick of equality to assets independently accumulated by the earners. Why is that fair? Practical Tips So, what protection can be sought by a wealthy individual in this new dawn? Ring fencing assets Married spouses should consider carefully which assets are to be pooled for the benefit of the family. Any assets generated during the marriage by the sole effort of one party should be kept segregated to minimise the application of the yardstick of equality. This may also be of particular importance in dual earning marriages. Even assets inherited or gifted during the marriage or owned prior to the marriage are vulnerable to the “right to share” principle where they have been merged into the matrimonial assets. Use trusts sensibly to benefit family members. Care should be taken not inadvertently to “nuptialise” a family settlement thereby exposing it to the powers of the family court to vary the terms of the benefit of the former spouse. Pre-nuptial Agreements Lord Mance seems to suggest that once needs and compensation have been addressed there is little justification to disturb the principles by which the parties had chosen to live their lives whilst married. This is implicit acknowledgment that spouses should be able to enter an agreement (pre or post nuptial) to regulate their financial arrangements on relationship breakdown and be held to those terms provided basic safeguards (disclosure, legal advice and in the absence of duress) have been adhered to. It has been wildly reported that these judgments will be a deterrent to rich men marrying. That need not be so as pre and post nuptial agreements could provide a good degree of protection. Such agreements are already a circumstance to which a court will have regard on divorce and it is a question of when, not it, they are held to be binding in the absence of significant injustice. Forum shopping In the post-White era England already had a reputation as a favourable jurisdiction for expatriate wives able to claim it based on criteria of residence or domicile. It was not thought the pendulum could swing much further, but divorcing husbands now face the daunting prospect of obligations of support for considerably longer than most other jurisdictions would impose. Wealthy individuals would be well advised to be alive to the possibilities of alternative jurisdictions that could have a connection with the marriage, a process known as forum-shopping. The time has come for divorce planning as well as tax planning. Emma Hatley is a partner in the family team at City law firm Withers LLP. Withers represented Melissa Miller.

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