UK: Pre-Nuptial And Post-Nuptial Agreements For Family Businesses

Last Updated: 21 December 2018
Article by Elizabeth Pearson

"Only for rock stars and professional footballers" was once the perception, but the reality is now much different

When considering succession planning, pre-nuptial and post-nuptial agreements don’t often spring to mind. Once viewed as "only for rock stars and professional footballers", we are now seeing more and more clients enter into these agreements as part of their succession planning, in particular where there is a family trust or family business involved.

This article explores how such agreements could help a family business with their succession planning, by offering a degree of protection for business assets, or assets that might be inherited by the next generation in the future. It also raises some of the most common issues that families might face when broaching the topic of such agreements, and suggests ways that these issues could be addressed.

The current legal position

It is important to note that nuptial agreements are not currently binding under the laws of England and Wales. The parties to such an agreement cannot override the Court's broad discretion to decide how to redistribute assets and income on a divorce. However, when considering an application for financial remedy, the Court must give appropriate weight to a nuptial agreement as a relevant circumstance of the case. Guidelines have been set out in case law as to how to give an agreement decisive weight in front of the Court. If independent legal advice is taken by both parties to the agreement, and these guidelines are followed, this can then give any such agreement the best chance of being upheld by the Court if required.

Common issues

An obvious issue that is often raised by clients is that these types of agreements are not particularly romantic, especially pre-nuptial agreements. At a time when newly engaged family members are probably rather excited, picking out colour schemes and cakes and working out where to sit Great Aunt Nora, agreeing what should happen on their divorce probably isn’t going to be very appealing to them. However, nuptial agreements can offer a number of benefits that shouldn’t be overlooked where family businesses are considering their succession planning.

One of the main advantages of a nuptial agreement is that it can offer an element of asset protection. They can be used as a way of 'ring fencing' certain assets in the event of divorce, for example, inherited assets or business assets. The agreement can, for example, be used by the couple to agree that other assets will be used to make financial provision for each other on any breakdown of the marriage. Where a business is involved, this can, in turn, also offer protection to any business partners of that party too, as it can help to prevent disruption to the running of the business should the marriage breakdown.

The ownership of business assets is something that will need to be carefully considered when drafting a nuptial agreement. Who actually owns the assets that are to be ring fenced? One party might view business assets as 'theirs', but is it owned by them personally, or is it held in a family trust, or as part of a partnership, or a limited company? All of these matters would need to be dealt with in different ways in a nuptial agreement. 

If assets are held in a trust, does that party have an entitlement to assets in the trust, or just a potential interest in them? Is the spouse/future spouse a potential beneficiary of that trust too? The Court has a wide discretion in respect of the provision that can be made from trusts on divorce, and are often more willing to look to trusts on a divorce rather than company shares, for example, where possible.

A nuptial agreement could be used to confirm that the parties agreed that other assets owned by them should be used to satisfy their financial needs on any divorce, rather than, for example, any family business/inherited assets held in trust. We shouldn’t therefore look at nuptial agreements and trusts as 'either/or', as they can together provide layers of protection to family businesses or inherited assets in this way.

If the family business is a limited company, consideration will also need to be given to what the Articles say about who can hold shares, and what happens on the sale of shares. A review of the Articles to consider restrictions on the ownership of shares could also help bolster the strength of any nuptial agreements too, as part of a wider estate planning exercise.

Nuptial agreements can sometimes be seen by one of the parties as a character slight. A family could therefore consider having a policy that all members of a generation should have a nuptial agreement, so that it is not just one fiancé who feels 'picked on'. They may even want to consider whether any partnership agreement or shareholders' agreement should refer to a requirement for post-nuptial agreements and pre-nuptial agreements too. This might go some way to reassuring a fiancé that they are not being targeted as untrustworthy. It might also help to prevent a younger generation feel that there is 'double standard' if their parents' generation don't have to put such agreements in place too.

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.

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