Five ways to save the family wealth from bad divorces
Prenups for parents and will trusts are just some of the ways anxious families can protect their assets. Laura Miller reports
Parents concerned that money intended for their children will fall into the hands of an estranged partner after a messy divorce can take heart from a recent court case which showed how to keep hold of family wealth. Last month, Ankul Daga, a 36-yearold City investment strategist, lost a court battle with his ex-wife Aparna Bangur, 34, a PR executive and daughter of one of India’s richest men, Krishna Kumar Bangur, the billionaire owner of Graphite India.
The dispute was over a £1m settlement Mr Daga argued he was entitled to following the breakdown of their decade-long marriage. But the money was part of a trust for Ms Bangur set up by her father before the couple got married.
Mr Justice Holman, the judge, dismissed Mr Daga’s claim and ruled the financial terms of the divorce should be based solely on the assets generated during their marriage.
Jane Keir of law firm Kingsley Napley, who represented Ms Bangur, said: “The case confirms the principle that non-matrimonial assets remain protected, including those held in trust structures.”
Divorce rates in England and Wales have fallen to a 45-year low. Yet Ms Keir said she is seeing parents increasingly reluctant to provide financial assistance to their adult children because they are anxious that the money could be lost in a divorce.
Gifts, advancements or inheritance from one spouse’s family, however, are on principle generally treated differently by the divorce courts than matrimonial assets generated by the parties during their marriage.
The decision in this case may reinforce the comfort that English law, for the most part, excludes family assets from the divorce process.
The security of prior arrangements, on which it relied, are how wealthy parents can take action.
Far from the preserve of couples themselves, prenuptial (and postnuptial) agreements are also being used by parents to protect family wealth and any contributions they may make, or have already made, to their children.
Abby Buckland, of Kingsley Napley, said: “A vast number are set up by parents. If you want to make gifts, transfer properties or assets, or leave inheritance to your adult child, but protect them from division in a divorce, a prenuptial agreement is essential. Some parents make it a condition of a gift or advance that an agreement is entered into.”
Prenuptial agreements state what should happen to each side’s assets in the event of a divorce. They set out what each has come to the marriage with, which should not be shared on divorce. After marriage a postnuptial agreement serves the same purpose and can be entered into at any time. There is no act of Parliament in England and Wales making these agreements binding. But in practice they will be enforced so long as they are freely entered into and do not lead to an unfair outcome for one party.
If you are making contributions to your adult child’s finances and want repayment at some point, put it in writing when the money is advanced. Ms Buckland said: “In a divorce, a judge will be far easier to persuade that the contribution from the wife’s parents towards the deposit on the family home was a firm loan which needs to be repaid, rather than a gift, if there is a clear, contemporaneous agreement drawn up and signed setting out the sum to be loaned, the purpose of the loan and detailing repayment terms and conditions.”
Family trusts applied in the Daga case. They are set up for a number of reasons, including to control and protect family assets, when a person is too young to handle their affairs, or to pass on assets while the giver is alive.
The trustees, who act out the giver’s wishes, are the owners of the assets held in a trust, not the beneficiary, keeping them safe from gold diggers.
However, Ms Buckland said the outcome of the Daga case could have been different if the couple’s lifestyle during marriage had been heavily supported by income from the trust.
She said: “The court can vary a trust or view it as a financial resource of one party and make orders accordingly.
“A discretionary trust is harder for a court to treat in this way than a fixed or ‘bare’ trust. A letter of wishes advising the trustees how best to carry out distributions can be a help when determining whether the trust is likely to advance assets to a particular beneficiary now, or at another point in the future.”
Wills and will trusts
A child’s divorce isn’t the only worry keeping parents up at night. Succession to the family wealth after the parent’s death is often the far greater concern, especially where a family business is involved.
A Bill targeting “predatory marriages” received support in the House of Commons last year and will be reviewed this month. It would establish that marriage should no longer revoke any pre-existing wills.
However, leaving a will that simply divides wealth equally among children may not be the best course of action, say experts.
Jim Sawer, a family law expert at Kingsley Napley, said: “As a way of preserving wealth for future generations, trusts have no equal.”
A trust can be created during a lifetime but is more commonly prescribed in a will. In most cases, the trust will be discretionary; the trustees decide which of the beneficiaries receives what, when, and on what terms. Key are the choice of trustees and the letter of wishes that accompanies the trust.
Trustees can be family members, independent professionals, business colleagues, friends or a mixture.
The letter of wishes can speak, rather than control, from beyond the grave. It gives helpful guidance to the trustees and can be a useful defence against claims that trustees are not acting in good faith.
Income from discretionary trusts, the most common type, is taxed. After an initial £1,000 allowance, dividend-type income is taxed at 38.1pc, with all other income at 45pc. However, if the discretionary trust pays the income to the beneficiary, and they are taxed at lower tax rates, they will be able to make a repayment claim. Capital gains tax may also apply.
To reduce the value of an estate for inheritance tax purposes in a way that retains control, either for the parent or chosen directors, a Family Investment Company or a Family Limited Liability Partnership can fit the bill.
Such a company is run by its directors and overall control by the shareholders, the children, can be tempered by careful allocation of shares and voting rights.
Control is kept in safe hands without denying the individual family members their right to enjoy dividends and capital.
However, HM Revenue & Customs announced last year that it has its sights set on these arrangements and trusts more broadly. A consultation runs until the end of this month.