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When happy couples decide to take the plunge into marital bliss, not many want to think about adding prenuptial agreements into the mix. After all, a contract that is associated with the idea of ‘what happens when this doesn’t work out’ doesn’t exactly sound romantic.

Prenuptial agreements definitely have an unfair stigma associated with them, mostly because of the perception that such contracts are designed to disadvantage one party over another in the event of a break-up.

In reality, it is no more than a financial planning tool that has the principle of fairness at the heart of it. No court will honour an unreasonable agreement that puts one party at a disadvantage. It’s a framework that can give clarity to both parties, during a time which is usually rather emotionally charged.

Who are they for?

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It’s most often used by wealthy families or individuals who want to ringfence assets they’ve acquired before the marriage, and that they don’t intend to be shared if the relationship breaks down. Or, it can be used to ensure that wealth passes generationally to children on one side of the family, or for the protection of a family business.

In essence: if you’re acting in good faith, there should be no unreasonable resistance to entering into such an agreement.

Postnuptial contracts have a similar goal to that of prenuptials, but instead of being signed off before the marriage, they are agreed after marriage. However, the other party has no obligation to enter into the agreement. In the same vein, cohabitation agreements should be considered as a planning tool, as couples increasingly live together before getting married. If couples live together for a prolonged period, parties may be open to certain claims, even if they were not married.

What should they cover?

The beauty of prenups is that they can cover just what you or your family deem important – there are no set elements, aside from the principle of fairness. It should also ensure that the needs of children are covered, such as a house and income stream – or at least have the flexibility for review should there be a major life event.

It’s up to the individual parties to ensure specific circumstances, i.e. where the couple are citizens of different countries, are addressed. Contrary to popular belief, prenups cannot be automatically enforced in any country.

US citizens have to pay particular attention here, as a settlement that seems fair by UK law may unintentionally disadvantage US parties. For example, if a US citizen gives assets to a non-US spouse in a divorce, that transfer is taxable.

Disclose the unknowns

The key to ensuring fairness for all parties is to disclose these issues in advance when negotiations start and get specific expertise for different areas. The courts’ objective is to achieve fairness and protection of the family wealth, if this was the intention of a fair prenup, but this can only happen if a judge knows which factors to consider and how this can impact each party.

Consideration of these complex issues as early as possible, with a clear and rational approach, can prevent bigger hurdles and unhappiness in the long run. A wealth manager, in collaboration with their networks of experts, can advise on an agreement that gives appropriate protection to your family and spouse’s needs.

 

Robert Paul, Partner and Head of US Family Office, London & Capital

 

Mary-Ann Wright, Managing Partner, Manders Law

 

Ed Rieu, Tax Consultant, US Tax, Sopher + Co.

 

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