The long awaited decision in Radmacher v Granatino 2010 UKSC 42 handed down by The Supreme Court on 20 October 2010 is very important reading for anyone about to get married (and their advisors), those who already hold a pre-nuptial agreement, and those currently considering inheritance tax planning.
When dividing assets on divorce, the English (and Welsh) courts operate a discretionary system. As a result, litigated outcomes are uncertain, potentially divisive and very expensive in terms of legal costs. The system is generally seen as advantageous to the spouse who did not create the wealth in the relationship, and levels of maintenance payments are very generous when compared with many other European countries.
Pre-nuptial agreements (which provide how any future divorce settlement will be dealt with) have been commonplace in many other countries for some time but there has always been an issue in England as to whether they are of any worth.
Summary of outcome
Radmacher is the clearest statement yet that the start point will now be that the divorce courts will do all they can to ensure such agreements are upheld. In addition it provides approval to the idea that an agreement entered into after a marriage has taken place (a post-nuptial agreement) can provide identical protection to a pre-nuptial agreement.
The simple facts were that the German wife married her French husband in 1998. She was extremely wealthy and asked him to sign a pre-nuptial agreement which he did, albeit she did not provide any financial disclosure and it was not translated into his native French. The document provided that he would get nothing in the case of divorce. It did not deal with what would happen if they had children.
When the couple separated 8 years later in London and litigated to resolve their claims, the husband was awarded approximately £5.6m of their £30m fortune at that time. The very experienced High Court Judge gave a lower award than otherwise would have been the case, because Mr Granatino had signed the agreement, but on the basis that its terms were not fair as they now had two children, and he needed capital to provide a home for them, as well as an income.
The wife appealed and the Court of Appeal held that the judge had not given sufficient weight to the pre-nuptial agreement. They therefore varied the order so the husband received a home to live in whilst the children grew up but then had to return it to his ex-wife. The case was appealed to the Supreme Court.
The Supreme Court held that:
The court should give effect to a nuptial 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 that agreement.
In defining fair the court felt that:
|1||Any agreement could not prejudice the reasonable requirements of any children.|
|2||The Court should respect peoples right to self regulate their financial affairs; to do otherwise would be “paternalistic and patronising”.|
|3||It was a good and fair way to protect property not accumulated during the marriage, including an inheritance.|
|4||Any agreement was more vulnerable if it did not provide for the other party’s basic reasonable financial needs. In Radmacher the agreement was varied to deal with those needs.|
|5||The Court made it clear that in each case the Court still had to consider whether the agreement was fair, but the presumption is now very much that the starting point is the agreement stands unless the court is persuaded otherwise.|
|6||In this case the pre-nuptial was created by a German lawyer and was intended to be determined under German law. It is clear that the English courts will now recognise foreign pre-nuptials if they meet the ‘fairness’ test outlined above. It is therefore crucial that anyone who has entered into a foreign pre-nuptial agreement (marriage contract) has their agreement reviewed by an English family lawyer if they are living in England.|
|7||A post-nuptial agreement can be equally effective and is not only appropriate after a couple have separated. Many parents worry about passing property to their offspring to save inheritance tax when that capital could then be lost in a subsequent divorce settlement. A post-nuptial agreement excluding that property from any subsequent settlement would now appear very sensible planning for parents whose offspring are already married with children.|
Implications for you and your clients
- A pre-nuptial or post-nuptial agreement should give your client certainty on separation provided it is clear, includes full disclosure and the other party has at least had the opportunity to have full legal advice.
- A pre-nuptial agreement is a very sensible way to protect wealth that is acquired before marriage, whether by inheritance or otherwise, or which is to be received during a marriage.
- At the very worst the court should be restricting any claim to reasonable needs once an agreement is in place.
Putting a pre-nuptial in place
We have significant experience in putting pre-nuptial agreements in place across a wide client base. If you have any queries or wish to discuss the content of this lawbite, please don’t hesitate to contact Gareth Schofield or Daniel Eames. For more information, please visit our asset protection pages.