Prenuptial agreements
It always used to be the case that prenuptial agreements were very much thought of as being just for the rich and famous. The media love to report on the weird and wonderful provisions that celebrities include in their prenups and whilst I’m not always convinced that the media reporting is (in any way!) accurate, it is interesting none the less. Khloe Kardashian allegedly has court side seats to all Lakers games in terms of her prenup with Lamar Odom. Although they never got married, allegedly Jessica Simpson and Tony Romo’s prenup said that she would have to pay him $500,000 for every pound she gained over 135 pounds!
The infamous prenup between Brittany Spears and Kevin Federline saw him receiving none of Brittany’s fortune on their separation. The prenup between Rupert Murdoch and Jerry Hall included specific provisions to protect his media empire and maintain confidentiality over sensitive commercial information. These are two examples of how a prenup can be used cleverly to properly protect assets and help make separation and divorce easier. Contrast that to the Jeff Bezos divorce. He reportedly didn’t have a prenup with his ex-wife Mackenzie Scott and their divorce settlement was, in contrast, a cautionary tale. The lack of prenup led to one of the most expensive divorce settlements in history with Scott reportedly receiving 25% of Amazon’s stock. This clearly highlights the danger in not having a prenup in place.
It is, however, certainly not the case that prenuptial agreements are just for the rich and famous. A prenuptial agreement is a sensible consideration in advance of any marriage. There is a tendency for people to get married later in life or perhaps to get married for a 2nd (or even 3rd) time. With that comes an accumulation of wealth, perhaps owning a house, having some savings and investments, owning a business or else receiving some inheritance. It is important that wealth, however great it is, is protected.
What is a prenuptial agreement?
A prenuptial agreement is an agreement entered into in advance of marriage. It sets out what will happen in the event of a separation and / or divorce in the future. Whilst very unromantic, it is much easier to negotiate and agree the terms of a prenuptial agreement when relations are good and everyone is in happy rather than when relationships break down. A prenuptial agreement is just like an insurance policy – hopefully you never need it, but it is there if you do.
For a prenup to be valid in Scotland it must fulfil three tests:
- It must be fair and reasonable at the time it was entered into.
- Both parties must have the opportunity to take legal advice before signing.
- There must be no pressure on either party to sign.
Fairness and reasonableness will very much depend on the whole circumstances of each individual case. There is sometimes a misconception that prenups protect the wealthier party at the expense of the other. While is it the case that prenups can be used to protect assets, they can also ensure certainty and fairness for both parties. While it might be uncomfortable for one party to list a multimillion-pound business or property portfolio and the other to list some minor assets such as an old car, it does add some context. On one hand this highlights the potential imbalance in terms of parties’ resources. But on the other, it demonstrates that the imbalance was know at the time the agreement was entered into.
Can a pre or post-nuptial agreement be overturned?
There was a case in 2021 at Edinburgh Sheriff Court (C v M 2021 S.L.T. (Sh Ct) 319) in which a husband sought to aside the terms of a post -nuptial agreement he had entered into with his wife. Although the case related to a post-nuptial agreement rather than a prenuptial agreement (in other words entered into after marriage rather than before) it is helpful in demonstrating that a court will set aside an agreement if it is clearly not fair or reasonable.
In the case the husband had signed an agreement which saw him receive only $50,000 in the event of his future separation from his wife. His wife was to retain the remainder of their wealth. At the point they separated their accumulated wealth was about $812,000 meaning that he would only receive 6% of the matrimonial property. The sheriff in Edinburgh said that at the time they entered into the prenup the husband was suffering from a severe depressive condition and that he was vulnerable. The sheriff said that the wife was in a dominant and abusive position over her husband and that she had taken advantage of him. The sheriff therefore set aside the terms of the prenuptial agreement. It was clearly not fair or reasonable.
A prenuptial agreement cannot be presented by one party to the other on the eve of the wedding. That leaves no time for legal advice or contemplation and that is a basis to challenge the agreement. Adequate time to take advice means that it needs to be drafted and signed well in advance (at least 3 months) before the wedding.
In Scotland the court will be slow to overturn an agreement, and the general view is that two adults can contract as they see fit. Provided the three tests set out above are satisfied, the prenup should survive any future challenge.
Understanding the benefits of a prenup with The Family Law Scotland Act 1985
To understand the benefits of a prenup, it is helpful to understand what the law in Scotland provides for couples who are married and don’t have a prenup.
The Family Law (Scotland) Act 1985 sets out the law regulating financial provision upon divorce in Scotland. This act sets out 5 principles which the court must apply when deciding what orders for financial provision to make in the event that the couple are divorcing. To paraphrase the principles are:
- The net value of the matrimonial property is to be shared fairly.
- A payment may be due when one spouse has suffered a financial disadvantage to the financial advantage of the other or the family.
- The economic burden of childcare may justify an additional payment.
- There may be payment of maintenance, for usually no more than three years, or a capital sum payment, to help the other spouse adjust to the lack of financial support on divorce.
- There may be such financial provision as is necessary where a spouse will suffer serious financial hardship on divorce.
What is the matrimonial property?
Matrimonial property can be acquired both before and during the marriage. A house (or furnishings) bought for the use of a family home before the marriage will be matrimonial property, even if it is in the sole name of one of the spouses. Thereafter, any property acquired during the marriage, other than property which has been acquired by way of gift from a third party or inheritance, which has stayed in its original form, will be treated as matrimonial property.
The significance of property which does not fall within the matrimonial property is that its value is not shared fairly between the spouses upon divorce. Instead, its value is left out of account when looking at the matter of fair sharing of the matrimonial property.
When things get complicated is where non-matrimonial property converts to matrimonial property due to changes made during the course of the marriage and that is where the prenuptial agreement intends to provide protection.
Fair sharing
The starting point when considering how matrimonial property should be divided is that the net value of the matrimonial property is to be shared fairly which is usually shared equally. The law allows the court to depart from an equal sharing of matrimonial property if there are special circumstances. A common special circumstance is when the matrimonial property is acquired using funds that are from a non matrimonial source.
Good examples of this would be money gifted to or inherited by a spouse which is used to pay for the purchase of a property or reduce an outstanding mortgage.
The conversion of non matrimonial property into matrimonial property
It can be easy for non-matrimonial property to convert into matrimonial property. In the worst case scenario, the net value of this converted asset is subject to being shared equally upon divorce.
This is where the prenuptial agreement comes into play. The main purpose of the prenuptial agreement is to ensure that only the net value of the matrimonial property acquired as a result of the income and efforts made during the marriage is shared. The prenuptial agreement intends to ensure that a conversion of non-matrimonial property during the marriage does not result in that converted property being shared.
What protection does a prenuptial agreement afford?
The agreement will protect separate property. The agreement will not protect property if it is given away – to a spouse or to anyone else. It will also not protect money that has been spent on non recoverable things like holidays.
The agreement should protect heritable property. Whilst there is usually provision for what would happen in the event that property is sold and another one purchased, it is usually sensible to review any agreement at the point a property is purchased as a further agreement might be necessary.
The terms of a prenuptial agreement are intended to limit the discretion which would otherwise be applied when it comes to the conversion of property owned either before the marriage or gifted or inherited to matrimonial property. It is impossible to guarantee that the full value of such assets would be treated as ring fenced in the event of the agreement being tested by the court but the agreement is clear enough about the intention to do so.
How are the terms of a prenuptial agreement decided?
The terms of a prenuptial agreement can be as sophisticated as are required. Common considerations are whether spousal support will be paid by either party to the other, who will meet school fees and / or extra-curricular costs and whether housing or accommodation will be provided by either party to the other.
Is my prenuptial agreement valid overseas?
Not all jurisdictions have the same approach to prenuptial agreements as we do in Scotland. In the event that there are assets abroad or a couple move abroad it is imperative that advice is taken in the relevant jurisdiction. It is often the case that mirror prenuptial agreements are put in place in advance of marriage and / or further agreements (likely post nuptial agreements) entered into between the parties in the future as their circumstances change. Cross border issues give rise to the potential for confusion, complexity and expense.
Prenuptial agreements are used to help ensure both individuals entering a marriage or civil partnership are in agreement of fair and reasonable terms in the event of relationship breakdown. Early advice from specialist family lawyers is therefore imperative. For more information, please get in touch with our team.
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