TT141: Pre-Nuptial Agreements

August 22, 2009

Estate planning is a lot easier and more tax efficient if you are married – which is of little consolation to the many people choosing to stay single these days. Perhaps one of the reasons for this reluctance to marry is the financial implication of divorce. In this edition of Topical Tips, we look at estate planning for couples, and ask if a recent case means that pre-nuptial agreements (‘pre-nups’) are now recognised under English law.

Estate planning and marriage – an example:

Peter and Jane are married. Peter gives Jane £100,000. He dies a year later, leaving everything to Jane.

If they are married, the IHT situation is benevolent: the gift is IHT exempt and no IHT is payable on his death. His nil-rate-band is not used in the will, so it is transferable to Jane, thereby reducing the IHT payable on her death.

If they aren’t married, the outcome is distinctly less favourable. The gift is only a PET (Potentially Exempt Transfer) and, as he died a year after the gift, it is added back to his estate in full.

There is no spouse exemption on his death, so after taking account of the nil-rate-band and any other IHT exemptions, IHT at 40% will be due.

Just to rub salt into the wound, the statutory rules on intestacy only make specific provision for spouses and civil partners. All that the unmarried partner can do is to seek a court order as a ‘dependant’ of the deceased.

Has the pre-nup’s time finally come?

The pre-nup is widely used in Europe and the USA as a binding agreement to regulate financial provision on divorce.

In the UK, it has struggled for recognition for reasons that are arguably well past their sell-by date, but the courts have been moving towards recognising its status for a while.

In a recent case, the Court of Appeal decided that a pre-nup should be considered in the event of a divorce and that it may even be decisive. This meant a much lower award to the husband of a wealthy heiress in this particular instance.

For those afraid to take the marital plunge, perhaps a pre-nup will make the marital waters a little less frightening!

Barnes Roffe Topical Tips

  • If you are married, take full advantage of the estate planning benefits.
  • If you are not married, make sure that you have a will in place – intestacy rules are not favourable to your significant other!
  • Married or not, estate planning is something that really should be done.
  • If you – or your children – are considering marriage, and you have concerns about protecting family wealth, consider a pre-nup.
  • Pre-nups must be done properly. Both sides should get independent legal advice before they sign up – and be prepared to make full disclosure of your assets.
  • A properly drafted agreement could make life easier and much less expensive if the marriage does come to an end.
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