Marriage inevitably comes to an end, for some couples as a result of death and for a substantial number of others as a result of dissolution.
Both endpoints have implications for the preservation of family wealth. The impact of the end of a marriage on family wealth will depend in part on the planning engaged in by the couple and in part on the laws of the jurisdictions with an interest in the marriage and the marital property. A good deal of attention is paid to ensuring that a prenuptial agreement (prenup) is in place before marriage; however, often too little attention is paid to whether the prenup addresses family assets that may be outside of the jurisdiction where the parties intend to reside and how trusts may be implicated when a couple’s marriage comes to an end. Even less attention is paid to whether an existing prenup will continue to provide the intended protection if the couple moves to another jurisdiction during their marriage.
Role of Family Office and Legal Advisors
The family office and legal advisors should ensure that there’s a clear understanding of the marital property regime of the jurisdiction where the couple intends to reside and the way in which family assets will be treated under that marital property regime. For example, California, Texas, France and Switzerland have as their default a community property regime under which property acquired during marriage, but not through gift or inheritance, is the property of the spouses; however, each of these jurisdictions allows a couple to depart from the default regime through a valid agreement or contract. By contrast, under English law, there’s no statutory basis for the enforceability of prenups. However, the 2010 English Supreme Court decision in Radmacher v. Granatino sets out a basis for respecting the parties’ wishes as set out in a prenup, provided that it doesn’t impair the interests of minor children and that the agreement is fair both at the time that it’s entered into and at the time of the dissolution of marriage. In addition, give thought to which jurisdictions might be venues for a divorce proceeding and whether it would be advantageous to take steps to avoid creating sufficient contacts to allow certain jurisdictions to become a venue in the event of divorce.
Care needs to be taken when a couple’s marriage or marital property involves multiple jurisdictions within the United States. For example, California, like 27 other states within the United States, has adopted the Uniform Premarital Agreement Act, which fairly clearly provides for the matters that can be contracted for in a prenup as well as sets out the conditions that must be met for the prenup to be enforceable under California law. Other states, such as New York and Massachusetts, have statutes allowing for the general enforceability of prenups but have relied on case law to more particularly define the matters that may be contracted for and the specific conditions under which a prenup will be enforceable. Under the Uniform Premarital Agreement Act, it’s important that the prenup not be unconscionable at the time that it’s entered into. By contrast, jurisdictions such as Massachusetts and England look at whether the agreement is fair both at the time that it’s entered into and at the time that it’s sought to be enforced.
Even when there’s an appropriately structured marital property agreement that takes into account the jurisdictions where the couple may live and hold property, consider how the assets of irrevocable trusts will be treated, whether the marriage ends as a result of a dissolution or death and whether there are succession laws that would produce an unanticipated result. In California, irrevocable trusts with respect to which a divorcing spouse is only a beneficiary, and not a settlor, can be considered in determining the beneficiary’s ability to provide spousal support and reached to satisfy child support obligations, but may not be divided as a part of the property settlement between spouses as the trust assets are clearly the separate property of the beneficiary spouse. In other jurisdictions, the courts will look at whether the beneficiary’s interest in the trust is a pure expectancy, which won’t be included in the determination of the marital estate, or is sufficiently certain to be characterized as a property interest, which would be subject to division as a part of the marital estate. That the assets of an irrevocable trust created by a spouse’s grandparents could be divided as part of the marital estate may be surprising to the beneficiary and the beneficiary’s advisors. That it may be possible for a spouse’s children by a prior marriage to defeat a gift of property in a civil law jurisdiction to the surviving spouse and defeat the U.S. estate tax marital deduction may be even more of a surprise. Therefore, when property is owned or will be acquired outside of the United States, plan to create an ownership structure that will be appropriate under local law, consistent with the family’s intent and tax efficient both in the United States and in the jurisdiction where the property is being acquired.
*This article is an abbreviated summary of “Navigating International Legal Considerations for Advisors Serving Multi-National Families: Part 2” by Laura A. Zwicker, which appears in the November 2023 issue of Trusts & Estates.