The Purpose And Key Features Of A Pre-Nuptial Agreement

Contrary to the lyrics of Ed Sheeran's well-known song, Pre-Nuptial Agreements are not just for beautiful people.

In fact, a properly drafted Pre-Nuptial Agreement may be an invaluable contract that plays an important role in many families' wider asset protection planning and helps to minimise acrimony in the event of a future divorce. Indeed, Pre-Nuptial Agreements can be a tool to help ringfence and protect family assets, businesses, and wealth for future generations.

What is a Pre-Nuptial Agreement?

A Pre-Nuptial Agreement is an agreement entered into by a couple before they marry or enter into a Civil Partnership in which they agree how their assets and finances should be split in the event of their divorce in the future.

A Pre-Nuptial Agreement is a relevant circumstance that a court should always take into account if either spouse makes an application to court for financial provision on divorce. Whilst a Pre-Nuptial Agreement is not legally binding in England and Wales, (and until Parliament changes the law, a court has ultimate discretion in respect of financial settlements on divorce) a court will often uphold the terms of Pre-Nuptial Agreements if certain requirements are satisfied, and the Pre-Nuptial Agreement is fundamentally fair (see below).

What criteria does a Pre-Nuptial Agreement have to satisfy to be upheld?

In their decision known as Radmacher v Granatino, the Supreme Court set out a number of features that a Pre-Nuptial Agreement must satisfy to be upheld:

1. The agreement must be entered into freely by both parties without any pressure being placed upon them. Both parties must be independently legally represented and be on an equal footing when negotiating the terms of the agreement. The agreement should also be signed no later than 28 days before the wedding date to prevent either party feeling pressured into agreeing the terms before the wedding.
2. Both parties must fully appreciate and understand the implications of entering into the agreement. This means that both parties must have made full disclosure of their finances to the other before the agreement is signed.
3. It must be fair to hold the parties to the agreement in the circumstances at the time. This means that the agreement cannot undermine the requirements of any children of the marriage; it should be reviewed periodically throughout the marriage and thought of as a living document; and the terms cannot leave one party with insufficient resources to meet their "needs" whilst the other party is comfortably provided for.

Both parties should expect that a Pre-Nuptial Agreement that meets the above criteria will be upheld by a court.

What are the advantages and disadvantages of a Pre-Nuptial Agreement?

The potential advantages of Pre-Nuptial Agreements include:

1. The potential to protect certain assets, such as family assets, business assets, future inheritance, and interests in trusts, by ringfencing them so that they are less likely to be used to settle a financial award on divorce.
2. Allowing a couple the freedom to agree how they would like to divide their assets in the event of a divorce without the division being imposed by a court.
3. Providing certainty at the outset, which can save time, stress, and costs in the event of a future divorce.
4. Minimising acrimony in the event of a future divorce by agreeing the terms for dividing assets before any potential future deterioration in the relationship, which may be especially important if there are (or are likely to be) children of the marriage.
5. Agreeing the minimum provision for a surviving spouse or civil partner in the event of the death of one of the parties to the marriage or Civil Partnership. As such, a Pre-Nuptial Agreement can serve as a useful supplementary document to a Will even if a marriage is ended by death and not divorce.

The potential disadvantages of Pre-Nuptial Agreements include:

1. As mentioned above, a Pre-Nuptial Agreement is not legally binding, and a court may not uphold the agreement (or uphold it in its entirety) if it considers the agreement to be unfair.
2. The legal costs incurred in putting the agreement in place, especially because it is hoped that the agreement is an insurance policy that never needs to be relied upon. These costs should, though, be weighed up against the much greater costs that could arise in the event of an application for financial provision on divorce.
3. A request to sign a Pre-Nuptial Agreement can be perceived as an insult and the less financially well-off party may feel vulnerable. Such concerns may, though, be less prevalent now that Pre-Nuptial Agreements are becoming increasingly widespread and better understood as an estate planning tool.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.