How do prenuptial agreements work?

You may have previously read our blog about the rising popularity of postnuptial agreements, in the UK. Pre and post nuptial agreements have become a  practical way for savvy couples to agree what would happen to their assets, if they separated. In this article we extend our commentary to the prenuptial agreement.

Although it may sound unromantic, some couples realise that things can go wrong and recognise how difficult it can be to make decisions when a relationship is breaking down. However, it’s not just couples looking for practical solutions in case of marital problems – parents, now more than ever, want to ensure their estate falls into the right hands.

A recent survey found that 30% of UK parents would not be prepared to leave an inheritance to their married children, because of concerns about their chosen partner, and the belief that they might divorce at some point. The same risks apply to those who want to make gifts to their children during their lifetime. It’s one of the reasons why trusts are becoming increasingly popular for parents planning their estate, while prenuptial and cohabitation agreements are on the rise with their children and partners.

Lucy Fisher, senior associate at B P Collins, explains the different options available to children and parents, addressing some commonplace questions you might have:

How do prenuptial agreements work and what do they do?

A prenuptial agreement is a way of making sure that the finances and assets of your child and their partner are specifically accounted for before they get married.

Pre and postnuptial agreements detail the couple’s assets and predetermine how they would be divided after a divorce. Crucially, the agreements may cover assets acquired both before and during the marriage, and can seek to limit the impact of divorce on ‘family’ assets, arising from inheritance or gift or possibly other family trusts. This can be reassuring for concerned parents thinking about their legacy.

Although not binding on the court in England and Wales, pre and postnuptial agreements are very persuasive, if the court needs to decide about the division of assets during a divorce.

Ultimately, having a pre or postnuptial agreement will reduce the likelihood of costly, time-consuming and emotionally draining disputes over the resolution of financial matters during a divorce.

How do prenuptial agreements work regarding cohabitation agreements?

It’s possible that, if a parent, you have children who are not married but are living with their partners. Cohabitees are the fastest growing family type in the UK, with numbers expected to reach 3.8 million by 2031.

A cohabitation agreement is one way for your children to protect their position, if and when, they decide to cohabit. A cohabitation agreement generally records the arrangements between two people who have agreed to live together. It records their rights and responsibilities in relation to the property, financial arrangements between them and what should happen if they decide they no longer want to live together. A cohabitation agreement can avoid the costs of litigation over their respective beneficial interests in the property they shared.

And what about loan agreements?

If you want to help one of your children buy a property, but don’t want to fall foul of the new 3% stamp duty surcharge, a loan agreement is a sensible route. The loan can be secured against the title of the property and repayable when it’s sold. In addition, the loan agreement can be forgiven in stages to optimise inheritance tax planning.

Does a trust also need to be created – and how?

A trust is a legal mechanism, which can be created during your lifetime or by your Will on death, where you place assets under the trustees’ control, for the benefit of a beneficiary or class of beneficiaries. It enables you to give away assets but keep some control. Trusts offer flexibility and wealth protection and, crucially, offer protection against the possible insolvency or divorce of the intended beneficiaries.

Trusts are widely used and come in many forms; the two most common forms are ‘Interest in Possession’ trusts and ‘Discretionary’ trusts:

  1. Interest in Possession Trusts: the beneficiary is entitled to receive the income from the trust fund or enjoy the use of the trust assets. If you set one up for your children, they won’t be able to cash in the assets within the trust but, will receive the income from it, for their lifetime. The assets can be protected and passed onto your grandchildren, either on your child’s death or if they decide to give up their right to the income. Tax issues relating to your children’s estates would need to be considered, as the asset will form part of their estate for inheritance tax purposes.
  2. Discretionary Trusts: the trustees have a pool of potential beneficiaries and have absolute discretion to decide which of the beneficiaries may benefit from the trust fund, in what way and when. For example, the assets and income could be slowly released to your children when necessary or held back completely. If a child’s relationship breaks down, the assets and income can be diverted to your grandchildren or any other beneficiary in your trust pool.

Be aware that The tax treatment of trusts is complex and you should take advice before embarking on a trust route. However, that should not be a reason to avoid them, as the flexibility and protection they offer you can outweigh the tax implications.

Conclusion

Many parents increasingly want to ensure that their wealth is left to their children and grandchildren. So there’s no need to feel uncomfortable about your child bringing up these financial matters with their partner, who will understand that you want to safeguard your financial position, and hence the subject of prenuptial agreements. With your children having clarity and certainty about their positions, it could save you all a lot of unnecessary heartache and expense further down the line.

Furthermore, the law and tax regulations change frequently so, if you already have a Will or trust, we advise you to review them at least every five years.

Your capital is at risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Lucy Fisher is a senior associate at B P Collins LLP, a member of the Law Society’s Wills and Inheritance Quality Scheme (WIQS). Their experts understand that everyone’s circumstances are different and they’ll tailor a Will to meet your needs. If you create a Will with B P Collins, they offer a complimentary review service for your peace of mind. The B P Collins Trust Corporation is a professional trustee service ensuring trusts are administered correctly.

Lucy Fisher

01753 278650

lucy.fisher@bpcollins.co.uk

www.bpcollins.co.uk

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