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

The Sunday Telegraph - Money & Business - - Front page - Trusts The Fam­ily In­vest­ment Com­pany

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.

Prenup­tial agree­ments

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.

Loan agree­ments

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.

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