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Dividing Times

Howard Bilton

HK Golfer

May 2011

Tiger Woods' recent divorce has brought the issue of pre-nuptial agreements firmly into the spotlight. Tiger was thought to be worth over USS2 billion but it is believed that he paid his now ex-wife "only" US$100 million mainly because he had a pre-nuptial agreement limiting her entitlement.

So do these agreements work and are they a good idea? Certainly, negotiating agreements about what happens in the case of divorce when contemplating marriage can hardly be romantic but pre-nuptial agreements are not a new thing; they have been around for hundreds of yells. Indeed during the 19th century in the US, before the Married Woman's Property Act of 1848, women almost always sought a pre-nuptial agreement because prior to that law everything a woman owned or inherited was automatically transferred to her husband. if he died or divorced her she could lose the lot. Nowadays they are more often used by wealthy husbands to try and protect wealth from wives. But this is not their only use. A standard pre-nup can, and should, contain many non-financial provisions. Detractors say they encourage bad behaviour by limiting the damage that can be done to a husband if he behaves unreasonably, commits adultery or gives the poor wife other grounds for divorce and at these matters should he left to the courts alone. Those in favour of pre-nups argue that they encourage marriage as wealthy individuals are more likely to marry if they gain sonic form of protection. And couples should be allowed to contract in any way or form that they wish.

Marriage is often described as a contract, and in any commercial relationship it is wise to prepare a written agreement so that there is no misunderstanding and so that you have a document to refer to in the event of dispute or a breakdown of the relationship. Why should marriage be any different? If MO people form a company together it is advisable and common-place to sign a shareholders' agreement. Often the negotiating process reveals differences of opinion which would make it impossible for the business to function. Better to get those misunderstandings out of the way first and walk away if those differences cannot be resolved up front. The same considerations apply when negotiating a pre-nuptial agreement. It must surely be better to find out about irrevocable differences before going down the aisle. Typically the agreement will deal with:

The division of property on divorce
What will happen to the marital home
Ownership of particular assets or possessions
Maintenance for the poorer spouse and for the children
Custody arrangements for the children and visitation rights for the non-custodial spouse
Schooling arrangements, religion and other matters of the upbringing of any children
Anything else you want to put in there

Children can often be badly affected by a marriage breakdown and this is exacerbated if the divorce negotiations are protracted and/or vexatious. Having everything laid out in writing in advance should speed up the process and help avoid rancour in the unhappy event of a marriage failing. So it would seem like a good idea for all parties to have a pre-nup. But are they enforceable? The answer to this depends on the country in question.

The leading authority on this is the recent Radmacher case in the United Kingdom. UK court cases are not binding on the Hong Kong courts but are highly persuasive. This principle was reiterated by Justice Cheung in the recent Hong Kong case of DD LIM' which confirmed that the starting point for divorce settlements was equality of division and no longer the reasonable requirements of the parties. The court was much persuaded by the UK case of White p White. In the Radmacher case, Katrin Radmacher, a 40-year-old paper industry heiress with a fortune estimated at USS80 million, was divorcing Nicolas Granatino, an investment banker who she married in 1998 and with whom she had two children. He was awarded £6 million but she appealed citing a pre-nuptial agreement in which he promised to make no claim on her assets in the event of divorce. The court sided with her and slashed his settlement, but gave leave for the case to be referred to the Supreme Court, which late last year upheld the judgement. Radmacher said: "I know some people think of prenuptial agreements as being unromantic, but fin- as it was meant to be a way of proving you are marrying only for love." It's hard to disagree with that logic. Refusal to sign a pre-nup, it might be argued, shows a clear motive to treat marriage as a profit making opportunity.

Up until now the UK courts have adopted the principal that such agreements are very persuasive and should be given "decisive weight" but are not necessarily binding. This has now changed and the Radmacher case seems to confirm that such agreements will always be binding sinless it would be patently unfair for them to be so. We can be fairly sure that the Hong Kong courts will adopt a similar attitude. In Australia, Canada, China, Thailand, US and most other European countries, pre-nups are legally binding. So it is really only in the UK and other jurisdictions that follow the UK's common law system where there is doubt.

An alternative to a pre-nuptial agreement is to put assets into trust before marriage. This avoids the potentially embarrassing and awkward negotiations required for a pre-nup . A correctly structured trust will also have other tax and dynastic benefits so is probably a good idea irrespective. Or why not adopt a belt and braces approach and have both a trust and a pre-nup?

But beware. The courts are increasingly treating the trust assets as a resource to which the settlor could have recourse and therefore including them in his or her net wealth when considering the division of assets on divorce. IF the settler rules themselves out from benefitting from the trust they should rightly take the assets out of consideration — as long as the trust has been properly set up and run to the entire exclusion of the settler. It is here where many trusts will fail as many settlors continue to regard the trust assets as "theirs" and many trustees allow this to happen by reacting to instructions from a settlor and failing to exercise independent management and control of the assets. Seniors find it convenient to have a compliant trustee but few realise that this very compliance will ensure that the trust fails an attack precisely because of this compliance. If trustees fail to show that they, and not the settlor, control and manage the assets the courts will treat the trust as a sham and treat the assets as still belonging to the settlor, so the trust will be ineffective for all purposes.

For now, Hong Kong, like the UK, has become a jurisdiction of choice in which to get divorced if you are seeking a healthy financial settlement from an estranged spouse. Trusts will pr assets protect a ct for the benefit of the children and other family members if they are set up prior to marriage; the settler can demonstrate that he should not benefit from the trust and has not done so. Use them as part of an overall planning exercise in conjunction with or instead of a pre-flop. Alternatively don't get married or, if you do, be very, very nice.

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