Legal
Prenups And Asset Protection: Tips, Traps For International Families

Carefully considered and well drafted PNAs, the author of this article says, can significantly mitigate the risks highlighted and should now be considered a vital component of family governance and wealth planning.
The following article looks at the asset protection structure
otherwise known as the prenuptial agreement. A good deal has been
written about prenups down the years and how they work – or not –
in various jurisdictions. Considering that marital breakdown can
overturn years of patient wealth creation, often dwarfing the
risks of falling markets and business failures, it is
unsurprising that so much attention is given to the topic.
The article comes from Ruben Sinha, who is a lawyer and member of
the London family asset protection team at the international law
firm Bryan
Cave Leighton Paisner. He advises ultra-high net worth
clients, private banks, professional trustees and family offices
on asset protection and complex high-value cross-border family
litigation. Having practised in both London and Hong Kong, most
of his work is of an international nature and he has particular
experience of advising clients with connections to and interests
in Asia and the US. (More details below.)
The editors of this news service are pleased to share these thoughts and invite replies. The usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com
The growth and globalisation of wealth over the last two decades
has seen ultra-high net worth families establishing and
implementing increasingly sophisticated asset holding structures
and wealth planning strategies. Advice is often focused on tax
mitigation, investment growth, succession planning and
philanthropy. But is sufficient consideration being given to the
potential impact a divorce may have on a family’s wealth?
In my opinion, asset protection is not high enough up the agenda.
Too often, asset protection in the context of future family
litigation – or “divorce proofing” wealth – is not on the agenda
at all. This is perhaps surprising given that English divorce
proceedings arguably pose the single biggest threat to family
wealth.
What is at stake?
A lot. On divorce, the English court has very broad discretion
when dividing wealth. Ultimately, the court will seek to achieve
“fairness”. An equal division of assets will only be departed
from if there is a good reason for doing so. Wealth accrued
during a marriage is now normally shared. But it does not stop
there. All assets - wherever and however they are held - are
potentially in the pot. Unlike many other jurisdictions,
“non-matrimonial” wealth - such as pre-acquired, gifted or
inherited assets - can be divided to meet a claimant spouse’s
needs. All of this has, over the last 20 years, led to a number
of very substantial financial awards being made and, rightly or
wrongly, London earning its title as the “Divorce Capital of the
World”.
It is well known that, in certain circumstances, prenuptial
agreements can be used as effective asset protection tools.
However, despite widespread belief to the contrary, these
agreements are not automatically binding in England. Broadly
speaking, the court should now uphold the terms of a PNA which
has been freely entered into with a full understanding of its
implications unless it would be unfair to do so. There has
certainly been a move over the last 10 or so years towards courts
placing increasing weight on these agreements.
There are, however, a number of important points which must be
considered if a PNA is to prove effective.
Planning ahead is key. Too often PNAs are done at the last minute
or “on the cheap”. This is fraught with risk, particularly when
substantial wealth is at stake. As the law in relation to PNAs
continues to evolve, this work has become increasingly complex
and nuanced. It is important that those considering a PNA obtain
advice from specialist lawyers who routinely deal with this type
of work - and in good time.
Ideally, a PNA should be executed at least 28 days before a
marriage to avoid possible arguments around duress and pressure
later on. Careful thought will of course need to be given as to
how and when the issue of a PNA will be raised. I suggest
discussions should start at least six months before a wedding and
ideally earlier if there are particularly complex or
international angles involved.
Advisors need to manage expectations and stay a few steps ahead.
This often involves asking the difficult questions and giving
firm (but diplomatic) advice. What if, for example, a client’s
fiancé refuses to sign a PNA and the relationship ends as a
result? Or if a client provides instructions very late in the day
and the wedding is postponed? These are all tricky issues which
require sensitive handling.
Be careful what you say. In the event of a divorce, the court is
likely to see the lawyers’ files relating to the PNA (not just
the agreement itself) and, also, communications directly between
the parties. The paper trail is key if later on (and as is often
the case) there are arguments around misrepresentation, pressure
or even fraud. At the outset, advisors ought to be aware of and
see all communications between the parties which make any
reference to the PNA. What may at the time seem like a fairly
benign message such as - “I’m only entering into this
because your family are forcing us to” - may, later down the
line, prove to be damaging evidence of duress or pressure which
could render the PNA useless.
Provide some balance. Too often these agreements are entirely one
sided. Suitable financial provision - which at the very
least meets needs - should be included in any PNA. Without
that, a PNA will almost certainly be considered unfair and,
accordingly, afforded very little or no weight by a court. It
always pays to include sensible and responsible financial
provision. This will always be fact specific and relative to the
family in question. But reasonably generous provision (of say £10
million ($10.44 million)) is very little compared with what could
be at stake for UHNW families if a PNA does not make proper
provision and is given very little weight in the event of a
divorce.
Particular issues will need to be considered when internationally
mobile families are involved. Where a divorce takes place can
make a huge difference in terms of financial outcome. As a result
the (perhaps controversial) practice of “forum shopping”
- where a party issues proceedings in the jurisdiction which
is most advantageous to them - has become increasingly
common. For the reasons outlined above, England is still regarded
as being financially very generous and is currently seen as the
divorce forum of choice for many claimant spouses. The issue of
jurisdiction (and where parties agree any divorce will proceed)
will need to be dealt with in the PNA and, if well drafted,
should reduce the risk of “forum shopping” in the event of a
divorce.
Do not assume an English PNA will be enforced by a foreign court
in the event of a divorce abroad. For those with international
connections, it will be important to ensure that specialist
foreign advice is obtained. The English PNA will need to be
drafted in such way so as to increase the likelihood that, if
necessary, it will be recognised and enforced by a foreign court.
In certain circumstances, it may be necessary to obtain a
‘mirror’ PNA in the countries with which a couple has
connections.
Similarly, it is often assumed that foreign PNAs will bind an
English court. That is not the case. The English court will not
apply foreign law. Instead, the foreign PNA will be looked at
against the English concept of “fairness”. International families
who have already executed a PNA (or submitted to a particular
matrimonial property regime) in another country should be
obtaining advice on how the English court might treat that
agreement. It may be necessary to have an English postnuptial
agreement executed to ensure comprehensive and robust protection
is in place.
The stakes are high. The risks are clear. For wealthy
international families an English divorce could turn out to be
financially disastrous. Sensible and responsible asset protection
should be well up the agenda. Carefully considered and well
drafted PNAs can significantly mitigate the risks highlighted
and, in my view, should now be considered a vital component of
family governance and wealth planning.
About the author
Ruben Sinha focuses on advising UHNW clients, family offices,
professional trustees and private banks in complex asset
protection and family cases. Over the last few years, he has been
involved in a number of high profile and reported cases, some of
which have shaped the law in these areas. He has developed a
niche with a focus on work at the ‘intersection’ of the
traditional family and chancery spheres, often advising on
matters involving overlapping matrimonial and private client
issues. Sinha’s focus is on asset protection to ensure that
wealth is preserved in the event of family disputes. He is also
involved in complex high-value cross-border family
litigation. Sinha has a particular interest in cases
involving offshore trusts and has significant expertise advising
professional trustees in the context of divorce.