When breakdown of a marriage or partnership looms, most couples are woefully ill-prepared for the consequences. If proper advantage was taken of the various processes developed by the law to help, and the professional advice available, significantly better outcomes should result for the couple, children and the family finances.
We live in a country where it is forecast that the number of couples cohabiting will increase from 2.2million to 3.8million in the next 20 years or so. Half the British public believe that cohabiting couples have the same rights as "common-law spouses", although no such rights exist - the law badly fails to protect the interests of cohabiting couples when they separate, but:
- less than 20% have sought advice about their legal position;
- only 15% of cohabitants take steps to safeguard their position;
- only 12% have changed a Will as a result of their cohabitation.
- Handling the process of breakdown
Different processes suit different couples. Normally the same processes suit children, but:
- Lots of people do nothing;
- Numerous people act in person;
- Very few people go to mediation;
- Fewer people collaborate;
- Most of those who involve lawyers negotiate against a threat of litigation.
The most advantageous settlements are based on trust, which sadly may be the element most lacking at the time.
So what is the legal background against which settlements at both the personal and financial levels may be achieved? What areas of law need to be covered?
- If you are married – it is divorce under a number of Acts.
- If you are cohabiting – it is the Trusts of Land and Appointment of Trustees Act 1996.
- If you have children – the Children Act 1989.
All areas are subject to rapidly developing case law, mainly where significant family wealth and business interests have been threatened, and “wealth protection” is the underlying issue.
Where are you going to divorce, and why does the location matter?
- England and Wales – known as wife friendly, with wide Judge's discretion
- Which Court in England suits you best? Local or Principal Registry?
- Have you considered being in a position to issue proceedings abroad, where the law may be more favourable to you when it comes to protecting your assets?
- Pre-emptive Action
If you are contemplating marriage and want advice on how to protect your wealth – don't marry! That is unless you are not wealthy and unlikely to acquire wealth. If you do decide to marry (which can have important tax advantages, and for Inheritance Tax in particular) then what can you do to protect your position?
- Pre-Nuptial and Post Nuptial Agreements
- Register of assets
- Full disclosure
- Legal advice
- Allow for foreseeable changes in circumstances e.g. children; moving abroad.
A “Pre-Nup” can have a real impact on financial outcome, even if it is not binding on the Court. It has to be properly constructed and advised upon.
What if you are married and separating? How can you protect your wealth?
- Seek finality (a clean break);
- Try to avoid second bites at your capital;
- Try to avoid potential inheritance claims following your death;
- Insure against claims;
- Encourage your spouse, if financially dependent on you, to remarry or cohabit.
It is easy to work towards a capital clean break and a Pension clean break. It is less easy to work towards a spousal maintenance clean break which can be expensive and often unaffordable.
- What if you are cohabiting?
An extremely powerful imbalance can be created on cohabitation, giving scope for exploitation of a partner. However, beware of potential changes in the law. It is constantly being the subject of political lobbying. As a cohabitee you have no rights financially for yourself. It is a commonly misunderstood area of the law. The areas to concentrate on for self/wealth preservation are:
- property title deeds – make clear who owns what;
- keep receipts for the purchase of any expensive items - who paid for what;
- be wary of joint accounts – they can be frozen and abused;
- declare Express Trusts (e.g. as to % split ownership of joint home) to avoid having to claim Implied Trusts (e.g. based on contributions to the mortgage or initial purchase price).
- If you are giving capital financial support, make loans not gifts. Protect that loan as a percentage of an appreciating asset, not as a fixed sum.
- Practical Tips
- Avoid leaving the family home prior to arriving at a settlement, and losing the capital gains tax (CGT) exemption on sale for married couples living together;
- If you are acting in person, for goodness sake get a final Court Order, because otherwise your former partner may come back and make a claim.
- Separate on the 6th April, so you have the whole of a tax year to consider the CGT and other tax implications.
You have a decision to make, whether to spend your life protecting your wealth, or getting on with life – and taking the best advice if things go wrong. Trying to work it out for yourself, perhaps to save costs, is unlikely to result in the best outcomes.