Divorce: How to protect your assets & your reputation
Divorce is something that few people plan for.
Dividing up shared assets and moving them out of tax-efficient vehicles can be costly and reaching a financial settlement can take a long time, sometimes years if both parties are contesting it. Here, divorce lawyer Harriet Errington provides some useful guidance on the divorce process, considering how to protect assets and avoid some common pitfalls before and during divorce proceedings.
Are there any mistakes you see people make before they seek legal advice/representation which could be avoided?
The following actions, which may seem sensible at the time, often cause problems in the long-run:
- Reaching an agreement before taking expert legal advice: without knowing the full extent of your partner’s assets and having an informed view of how the court would divide the assets in the event of a divorce it would be a mistake to reach any firm agreements as to how the assets should be divided. If on seeking advice you subsequently discover the agreement reached to have been ill-judged and wish to go back on that agreement it can create mistrust, raise expectations, and gets things off on the wrong foot.
- Gathering information and documents that don’t belong to you: tempting as it is to open your spouse’s bank statements, log into his/her email accounts and take a look in their filing cabinet, such action is not permitted by the courts and evidence obtained inappropriately is not generally admissible in family proceedings.
- Transferring assets to third parties, into trusts or moving them offshore: as set out earlier, the courts will view such actions as done with the intent to deceive the court and can reverse any such transfers.
- Moving out of the marital home: as hard as it may seem, it may be advisable to stay living in the marital home with your spouse and the children. If either party moves out, it may benefit the remaining party in arguing that he/she has the main care of the children and therefore has a greater housing need. It may also leave the remaining spouse in a more comfortable position financially, which often does not assist in incentivizing him/her to resolve the matter swiftly.
- Taking unilateral action to impose new arrangements upon the children and seeking to involve them too much in the detail of their parents’ divorce: children often have difficulty coping with a divorce and it is preferable to put on a united front and make it clear that the children are not expected to take sides or involve themselves in their parent’s disputes.
- Moving in with a new partner before finalizing the divorce: the family courts are bound to take into account the financial circumstances of any cohabitee following divorce. If you end up sharing the bills with a new partner he/she will be viewed by the court as a potential resource and you will be obliged to share details of his/her financial circumstances with the court.
If you’re going through a rough patch and you notice your spouse starting to move assets around, or into unconventional structures, what should you do?
Just as the family courts have the power to transfer assets from one name to another, its powers extend to unraveling complex financial structures such as trusts. Parties to a divorce are required to make full disclosure of their financial arrangements for at least the 12 months preceding the divorce (and in some cases even earlier) and so any movement in assets can usually be picked up through an analysis of bank statements, investments and company accounts. A court can then vary or even reverse the settlement of assets into trusts or other unconventional structures.
If a party to a divorce has moved assets into another jurisdiction, the English family courts have the power to make orders that those foreign assets should be returned and such orders can be enforced internationally. Such actions can be set aside by the court or notionally added back to the pot for division between the parties as if the asset transfer had not taken place. Alternatively, a judge might be more likely to order more of the English-based assets to be transferred to the other spouse, if sufficient exist. It is not uncommon for freezing injunctions to be issued during divorce proceedings if one party suspects the other party may be about to sell or transfer assets, so as to protect the “innocent” party’s position while the financial claims are determined.
Despite the wide-ranging powers of the court to protect spouses from the other party’s dissipation of assets, if you do notice your spouse starting to move assets around the best thing to do is to consult a specialist family solicitor in order to ensure that you are protected in the event of a divorce.
Does my spouse have a stake in my company?
The court’s starting point in relation to the division of assets on divorce is equality between the parties. This includes shares in private (or indeed public) companies. As a shareholder in a private company, there may be various arguments you can deploy to rebut the presumption of equality, such as the fact that you built the business up before meeting or marrying your spouse, the shares are illiquid, or, in limited circumstances, you could run an argument that your “exceptional contribution” to the assets warrants a departure from equality.
The first step will be to ascertain the value of the company assets. This may be done initially through the company’s accountant but if both sides do not agree on the value, the company may need to be the subject of an independent forensic accountant’s report. Once a value has been determined the correct percentage to which the other spouse is entitled will need to be decided. This may well be 50% or, depending on the arguments put forward by both parties, it may be different.
The family courts will look at the liquidity in a private business in order to ascertain what, if anything, can be extracted from the company so as to satisfy the other party’s entitlement. This, together with the transfer of a greater proportion of the copper-bottomed family assets (for example cash and equity in more liquid property) may well be the preferred means of paying out the outgoing spouse and possibly for achieving a clean break between the parties. If this is not achievable the courts may look at various methods of meeting her entitlement on an ongoing basis, including transferring shares or deferred lump sums over time. The preference of the company shareholder will usually be to achieve a clean break, thus enabling him or her to carry on with his business enterprises post-divorce in the knowledge that his or her spouse’s claims have been met in full.
How can you keep a settlement private?
If divorce and financial remedy proceedings are issued, representatives of the media are, in principle, allowed access to attend some court hearings. For those litigants who are concerned about protecting their privacy from the media, there is the option to make an application either to prevent the attendance of the media altogether or, failing that, to impose restrictions on what the media can report. These issues are dealt with on a case-by-case basis and the approach adopted by different members of the senior judiciary can be radically different. Shareholders in private businesses will generally be very wary of allowing media access to the proceedings, which will contain a detailed analysis of expert accountancy evidence and in-depth management figures. Furthermore, one party to a divorce may be more concerned to protect his/her privacy than the other and one often sees the aspect of media access to hearings being used as a bargaining chip between parties.
The best way of ensuring that a settlement is kept private is to use alternative methods of dispute resolution such as mediation, arbitration, or negotiation through solicitors without proceedings being issued. This will ensure that the details of the settlement are kept private between the parties and away from the prying eyes of the media.
Does the length of marriage tend to dictate a judge’s attitude to how a couple’s assets should be divided?
Family judges in England and Wales are bound to consider all of the circumstances of a case in reaching a decision as to how the family assets should be divided on divorce. In doing so they must take into account a wide range of factors; the first consideration always being given to the welfare of any children of the marriage. One of the other factors is indeed the duration of the marriage but there are various other considerations such as the income, earning capacity, financial resources, needs, contributions, the standard of living, and ages of the parties. The family courts also add to the duration of the relationship any period of cohabitation which leads seamlessly into marriage; therefore a two year marriage preceded by two years’ cohabitation will be treated as a marriage of four years in the eyes of the family courts.
In general terms, parties to a marriage lasting just two years are likely to find a court treats them very differently to a couple who have been married for 30 years.
The fact that a marriage was short will strengthen arguments against the assets being divided equally and will help arguments brought by either party in favor of ring-fencing assets owned prior to the marriage. Conversely, with a long marriage, it may be difficult to persuade a judge that pre-acquired assets should be treated differently given the length of time that will have passed and the inter-mingling of different classes of assets over the years.
How important is it to keep any assets acquired during a marriage in both spouses’ names?
It is a common misconception that assets may be protected in the event of a divorce by keeping them out of either party’s legal ownership. As a result, one often sees properties, shares or investments having been retained by one party for the duration of the marriage. Often people seek to transfer assets from joint to sole names or even to a third party in the expectation of a divorce. In reality, family courts have the power to slide the ownership of assets across between the parties. This includes the power to transfer properties and order lump-sum payments in order to achieve a fair outcome. Therefore the transfer of assets with a view to keeping them out of another party’s reach can prove to be a fruitless and unprofitable exercise.
By contrast, the courts do not have the same power to transfer assets between unmarried couples, even if they cohabit. Disputes about the ownership of property between unmarried couples are dealt with in terms of strict property law. As a result, if the house in which an unmarried couple have lived together for 30 years is in fact owned outright by one party rather than jointly, the other party may well find him/herself with no rights whatsoever on breakdown of the relationship. The exception to this rule is where there are children. In these cases, the courts have the power (albeit such power is more limited than on a divorce) to provide housing and an allowance for the primary carer of the children.