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Preserving multi-generational family wealth on death and divorce

Date:22 JUL 2020
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Senior Client Partner

Families are increasingly concerned about succession and preserving family wealth across multi-generations. Integral to this is designing and implementing estate planning measures to provide for, and benefit, their children and future generations. The irony is that in seeking to support their children and to protect, preserve and ensure the safe succession of their wealth to the next generation, parents may well be putting a significant part of the family wealth at risk, should their adult child get divorced in the future.

Jordan Williams, wealth manager at Artorius, and Abby Buckland, Senior Associate in the family and divorce team at Kingsley Napley, believe that a collaborative approach at an early stage is necessary. In this blog, they share some of the practical ways in which family wealth can be preserved in the event of divorce or death. 

Time must be taken to discuss what is important to a particular individual/ family today, tomorrow and for future generations. Good wealth managers work with clients and their advisors, reviewing their financial situation to ensure their affairs are appropriate and providing guidance and assistance to address any areas of need.

The pace of planning for succession and providing for the next generation has undoubtedly accelerated for many families in recent months with the outbreak of the global COVID-19 pandemic. The speed, surprise and severity of the coronavirus pandemic has caused untold hurt, hardship and loss for many. One direct consequence of its devastation has been the growing desire of many families to review their financial affairs, ensuring they are fit for purpose, with appropriate succession plans in place that can be implemented in case of death. Matters that have often been overlooked, or placed to the bottom of the pile, which have nothing to do with directly growing wealth, but are absolutely key to protecting and preserving wealth. These include IHT & Estate Planning, Life Insurance, Wills and Lasting Powers of Attorneys, which are now rightly at the forefront of discussions and at the top of many families’ agendas.

Measures to protect family wealth in the event of divorce

However, in devising and seeking to implement such succession and estate planning measures comes the realisation for many parents that their children will stand to receive significant amounts of wealth, and the resulting concern about what effect a divorce could have on this wealth.

Whether parents are making lifetime gifts to their children, providing capital for a child’s business venture, or simply naming them as beneficiaries to their estate, the end result is that a significant part of the family wealth, which the parents have conceivably worked hard to generate, is now out of their control and exposed to potential challenge.

Divorce is not what any parent wishes for their children, but the number of parents raising the issue and seeking advice as to what measures can be taken to limit this risk is growing rapidly. Rightly, it is a subject which should be addressed when reviewing a family’s overall wealth management strategy and is integral to maintaining a sustainable wealth plan.

There are measures which can be taken, and key to a successful outcome is unquestionably having joined up advice between the family’s wealth manager, who is fully aware of the family’s overall wealth position and family dynamic, and expert matrimonial lawyers, who in collaboration, can guide the family on what actions can be taken, by whom, and when?

There are a number of proactive steps that can be taken to help preserve wealth intended for immediate family, in the event of a divorce later down the line.

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Prenuptial agreements

Prenuptial agreements (“pre-nups”) are often used to protect family wealth and any contributions parents have made, or intend to make, to their children. If a parent wants to make a gift, transfer properties or assets, or leave inheritance to an adult child (including as part of early estate planning measures), but protect them from division in the event of a future divorce, a prenuptial agreement is essential. Some parents make it a condition of a gift or advance that such an agreement is entered into.

Whilst currently there is no act of Parliament in England and Wales making these agreements binding, in practice they will be enforced so long as they are freely entered into by both parties with a full appreciation of its implications and, importantly, the agreement does not lead to an outcome which leaves one party in real financial need.

There has been a steady rise over the last 10 years in those seeking to have a pre-nup in place. They are much more common than they were a decade ago and increasingly, clients are looking to prepare pre-nups to give them more certainty about their financial rights and obligations if the marriage breaks down and also to tackle financial, tax and succession planning.

A pre-nup needs to be approached carefully and sensitively; there is a distinct lack of romance in contemplating a marriage breakdown before (or shortly after) a wedding but looking ahead is essential for families who are concerned with succession planning and preserving family wealth. Very often the desire to have such an agreement in place comes from family in the background and when that is the case, a delicate balance needs to be struck between keeping all future relationships intact but achieving the required agreement. A good matrimonial lawyer will help you to accomplish that.

Postnuptial agreements

After marriage, a postnuptial agreement (“post-nup”) serves the same purpose as a pre-nup and can be entered into at any time. In exactly the same way, a post-nup sets out how assets should be distributed should the marriage break down. The most common reasons why a post-nup, rather than a pre-nup is entered into is that it was not thought about before the marriage, the couple simply ran out of time before the marriage to have a properly considered, negotiated and executed pre-nup drawn up (the Law Commissions recommendation is that the agreement should be entered into at least 28 days before a wedding) or there has been a change in financial circumstances (such as a gift or advanced inheritance) for one of the parties to the marriage.

Loan agreements

If a parent expects repayment of their contribution to an adult child's finances, then this should be set out in writing when the money is advanced. It is increasingly common for parents to contribute money to their offspring for a family home, or property renovations and if that contribution is a loan, not a gift, then a properly drawn up loan agreement can provide an added layer of protection in helping to ring-fence that money upon a future divorce.

In a divorce, it will be far easier to persuade a judge that the contribution from one party’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. Ideally this should be a formal loan deed drawn up by a lawyer and should set out the sum to be loaned, the purpose of the loan and detailing repayment terms and conditions.

No-one goes into marriage wanting to think about and plan for divorce and for parents, asking a child and their (future) spouse to do so is not an easy task at all. However, an experienced matrimonial lawyer will help to address this sensitively and cohesively, whilst achieving the necessary protection required and working closely with relevant wealth management advisors.

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