Podcast S3E5 | Family: Nuptial Agreements

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Podcast S3E5 | Family: Nuptial Agreements

Podcast S3E5 | Family: Nuptial Agreements 1400 788 Alfred Ip
Reading Time: 13 minutes

Alfred Ip and Raphael Wong discuss nuptial agreements – prenuptial and postnuptial. They talk about enforceability, legal representation, assets disclosure and renegotiation, as in the high-profile rumored case of Melania Trump and the former US President. They also compare such arrangements for protecting financial assets using Family Trusts and give real-life examples about how individual situations might differ.

Show Notes
02:59 What is a nuptial agreement?
06:16 Are family trusts an alternative?
07:30 Radmacher v Granatino
09:12 Enforceability of nuptial agreements
12:17 Legal representation of the parties
12:58 Full and frank disclosure
17:17 Reviewing and renegotiating agreements
19:23 Choice of law and choice of court
21:29 To sum up


TRANSCRIPT

Welcome to Series 3 of The HIP Talks podcast: a series of discussions on legal issues hosted by Hugill & Ip Solicitors. The firm provides high quality legal services with integrity, professionalism and respect for its clients and the community. An outstanding team of lawyers who have achieved exceptional results and recognition in the areas of Dispute ResolutionCorporate & CommercialPrivate ClientFamilyEmployment & Business Immigration and Data Privacy.

Raphael Wong  00:29
Morning everyone. My name is Raphael Wong and I’m joined here this morning with Alfred Ip and we’re going to talk about nuptial agreements. Morning Alfred!

Alfred Ip  00:39
Good morning, Raphael.

Raphael Wong  00:40
So do you know that divorce rate is growing everywhere in Hong Kong and according to the Hong Kong Government statistics, in 2004, there were over 15,000 divorce decrees and in 2019, the number jumps to over 21,000. Now, the divorce rate, obviously has increased and the reason for divorce varies, but it’s very often that divorce is very expensive, and it’s emotionally draining for the parties. And seems like more and more people are now considering means to reduce such financial risk. And one of the common ways to do so is to enter into a nuptial agreement.

Alfred Ip  01:25
So Raphael, why do you think so many people get into divorce?

Raphael Wong  01:29
This is a very interesting question. In short, I think because the opportunity-cost for getting a divorce has been lowered and the society has evolved. The society is more concerned with equality and also the line of cases recently, which are more pro-wife. So that’s why there is a general increase in divorce rate in Hong Kong. What do you think, Alfred?

Alfred Ip  01:59
I think Hong Kong is a difficult city, the living standard is very high. People do get into unhappy events or incidents. And there are more temptations as well. This makes marriage life very difficult to maintain. And when there are issues, couples may not be able to resolve them effectively. And then the relationship deteriorates, and people start looking at whether ending the relationship would be the only way forward. But with the risk getting higher and higher, actually people before getting into marriage or in the course of marriage should discuss this and think about how to resolve this when the relationship is still intact with sense and good discussion. So, this is why people should think about prenuptial agreements. But how to make a prenuptial? Actually, what is a prenuptial agreement?

Raphael Wong  02:59
In the simplest form, a nuptial agreement is simply a contractual arrangement made between two parties to regulate their financial arrangement between themselves in the event of the breakdown of a marriage. I always considered a nuptial agreement very similar to an insurance. No one wants to have a divorce, but when it happens, you do wish you have a valid and enforceable nuptial agreement. So to put in to a more perspective, if the nuptial agreement is signed before a marriage, we call it a prenup. And if it is signed after a marriage is a postnup. So, Alfred, who do you think should sign any nuptial agreements?

Alfred Ip  03:44
Well, it very much depends on the relationship. In the past experience we have come across couples who are very different in terms of background and financial strength, for example, when older parties marrying a younger party. And apart from the love and affection, they have to each other, they also look into other aspects of the relationship such as financial security. The financially stronger party may want to ringfence the potential liability in the event that the relationship or marriage doesn’t work out. The financially weaker party may also want to secure his or her financial situation in that event, so a prenuptial agreement is something that is definitely advisable. Another situation would be actually more common when both of the parties entering into marriage are of equal footing. They’re both are gainfully employed or they’re from a similar financial background, and they just want to set their respective liability or responsibility in place that they do not want to share finances – contrary to a lot of people believe that when two parties become married, their finances should become one. They don’t want that, so they want to make sure that this is in place with a clear prenuptial agreement, so that there will be no misunderstanding in the course of marriage.

Raphael Wong  05:16
And I’ve also seen cases where, in a family trust settings, the family trust actually requires the beneficiary to enter into a nuptial agreement in order to remain as a beneficiary. So, to have a quick recap, I heard that you said there are parties who have to protect or want to ringfence their family assets. And another type is where two young couples with a promising career they want to regulate their financial arrangements. And also if what I’ve seen is, if people enter into a second marriage, now that they have experience in the first divorce, they also want to avoid the risk in the second divorce. So, Alfred, what do you think the differences between a nuptial agreement and a trust, it seems that both of them will offer more or less a level of protection in the event of a divorce.

Alfred Ip  06:16
But actually, it is very different. We’re talking about prenuptial agreement or postnuptial agreement, which is an agreement between the two parties over the financial arrangement in the course of the marriage, compared with a family trust, that basically the concept is to set aside certain family assets to put it into a trust for the beneficiary interest. And the beneficiary may not be the marriage parties. It could involve other family members, such as some children, and also other family members such as the parents. And it also involves an extra party that is the trustee who has the liability and responsibility to look after the financial assets for the benefit of the beneficiary. So to me, a trust is definitely a more ringfenced or more secure way to protect your family assets. But it very much depends on the circumstances to see whether a family trust is actually helpful to the parties or the family’s objectives. So in that respect, in order to make a prenuptial agreement valid and enforceable, what does it entail?

Raphael Wong  07:30
You have asked the key question, which is how to obtain a valid and enforceable agreement. In the in the famous Radmacher (v Granatino) case, the case law stated that which I quote: “the court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications, unless in the circumstances prevailing, it would not be fair to hold the parties to the agreement”. So basically, there are two elements to having a valid and enforceable agreement, the first part being that it has to be entered into by the parties freely, and they have to have full understanding of the terms of the agreement. And the second element being that the terms of the agreements have to be fair. Now also, one thing to bear in mind is that nuptial agreements are not binding in Hong Kong. The reason is that the parties cannot by agreement oust the jurisdiction of the court, especially on children matters. But on the other hand, the court should also respect individual autonomy. In short, if the agreement was entered into by the parties freely, and the agreements are fair in the eyes of the court, the courts will likely uphold the agreement. And in principle, this test is applicable to pre and post nuptial agreements.

Alfred Ip  08:55
So, you’re saying that it is not enforceable, but that it can be enforced by the court.

Raphael Wong  09:01
It will be one of the factors which the court has to seriously consider or give heavy weight to when determining any claims by the parties.

Alfred Ip  09:12
Actually, this is a question that I often come about. A lot of people ask me, is a prenup enforceable? And I always answer: it is and it is not. It makes me sound like a lawyer that is not giving a straight answer. Can you help me answering that question?

Raphael Wong  09:30
Unfortunately, in Hong Kong at the moment, nuptial agreements are not enforceable strictly.

Alfred Ip  09:38
We always call it that there is a persuasive value to it.

Raphael Wong  09:42
Indeed, indeed. So, all I can say for now is that if the agreement is well drafted, the court must give it as you said, it’s very persuasive and it’s very likely that the court will uphold the party’s agreement.

Alfred Ip  09:57
But this is the reason why I said earlier when we’re talking about a family trust to be set up to achieve the same purpose of ringfencing the family assets actually is a much better protection to the family compared with a prenuptial or postnuptial agreement, which is of persuasive value only.

Raphael Wong  10:18
I agree, I agree with you. The only thing I want to add is that the cost associated with setting up a trust is usually much higher than entering into a nuptial agreement. So, in that sense, a nuptial agreement is more available to the general public, whereas a trust may be only limited to those really high net worth clients.

Alfred Ip  10:40
It’s true. So, if a client wants to have a post nuptial agreement or prenuptial agreement and want to make it enforceable, how would you help the client to do that?

Raphael Wong  10:50
So, we would have to tackle the two issues that we raised. That is, the parties must first sign the agreements under free will with no pressure. And one way we do that is to ensure that the parties have sufficient time to consider the terms of the agreements before signing. And UK case law actually suggests that there’ll be a minimum of 28 days between the signing of the agreements and the date of the wedding.

Alfred Ip  11:18
Actually, I would say that the earlier to sign a prenup, the better. Because I don’t want a bride/groom to say: “oh, I only want to sign that because I don’t want to cancel the wedding”.

Raphael Wong  11:30
And in that scenario, obviously, the more time is better. But if it’s too rushed, then we might consider suggesting to the couple that they should enter into a post nuptial agreement.

Alfred Ip  11:44
That makes sense, don’t rush into an agreement and potentially spoil the wedding.

Raphael Wong  11:50
Exactly. Now, when we say has to be signed under the free will, the parties should also have full appreciation of the effect of the agreement. Now, in that respect, the parties entering into the agreement should have proper independent legal advice. And the agreement should be well prepared by a legal practitioner with experience in this field.

Alfred Ip  12:17
And actually there are a lot of times when people ask me “can my other half be not legally represented or myself not legally represented?” I say no. If you want to make sure that the agreement is enforceable in future. Yes, it will involve two sets of lawyers, but then I’m having it is actually quite important to make sure that both parties understand what their standing is what their right is, before signing it to make sure that it is enforceable in future. Otherwise, what’s the point of signing an agreement?

Raphael Wong  12:51
Indeed, in the end, you might be spending more time and cost on arguing the matter if you have an invalid agreement in the first place.

Alfred Ip  12:58
Yeah, and other things that we often advise clients is to full and frank disclosure, what is it?

Raphael Wong  13:06
That is partly related to having full appreciation of the effect of the agreement. Without full and frank disclosure, you are not really sure what you’re getting yourself into. So what we would advise the clients is that each party would have to disclose the essence of their worldwide assets in the form of a table attached to the agreement. Also, we would usually when preparing the agreements, we will state, the party’s current occupation, their income, their education level, and also their expected future income. Now, it’s very interesting to note that in the Radmacher case, the failure to provide full disclosure was not fatal to the agreement. The husband in that case knew that the wife had substantial wealth, but did not bother to find out exactly how much, but as a practitioner, we should not take this risk and we should always insist that there be proper assets tables prepared by both parties and attached to the agreement.

Alfred Ip  14:09
But if I’m the party who has assets which may be bringing into the marriage, and I don’t really want my spouse-to-be to know how much my net worth is. I may be hesitant into signing a prenuptial agreement. So, what should I do?

Raphael Wong  14:24
Well, in that case, we have to advise them you’re taking a huge risk of having a not enforceable nuptial agreement…

Alfred Ip  14:33
…or alternatively set aside your assets – premarital assets – and settle it into a trust.

Raphael Wong  14:40
That will do as well.

Alfred Ip  14:41
Yeah. What do you think is a fair agreement?

Raphael Wong  14:46
A fair agreement is obviously subjective, but when is being adjudicated. It is in the eyes of the court and also fairness at the time the breakdown of the marriage. So, you can see that there will be many variables down the road, and there will be a lot of material changes that may render a nuptial agreement unfair in the eyes of the court. So, in that sense, it might be prudent to revisit the agreement from time to time, as I said, whether an agreement is fair or not depends on many factors. But I can share what the typical arrangements are when we’re preparing a nuptial agreement. Usually, as you said, the first type is we segregate or ringfence premarital assets, and we only share – or the parties only share – assets they accumulated during the marriage. The second type is what we call a “variable type” nuptial agreement. There is a formula to how much money to be paid out and usually is a formula in relation to the duration of marriage: the longer the duration, the larger the payment.

Alfred Ip  16:00
So, for example, if I can say, my wife will only get 1 million after being married with me for two years, and then she’ll only get 3 million after marrying me for three years. That is enforceable?

Raphael Wong  16:16
As a matter of concept, this can be enforceable. But again, as I said, it depends on the circumstances of the case. If the whole assets, it’s much larger than three million, and if the party’s standard has been so high during the marriage, that three million is insufficient to the wife or the whoever is receiving the money, then it might not be fair in the eyes of the courts. And another point to note is that the agreements have to be very careful when talking about children’s expenses, the court is unlikely to consider any terms regarding children maintenance as fair if they are not generous. So, coming back to your question, is quite hard to say whether any specific agreement is fair or not, unless we put into perspective, and that would depend very much on individual cases.

Alfred Ip  17:17
So, it sounds like it’s not just one agreement to be made before parties getting into marriage. The agreement has to be constantly reviewed and reconsidered in the course of the marriage in order to reflect the actual situation.

Raphael Wong  17:33
Indeed, so from time to time, we would, or actually in the agreement, we can put in place that the parties have to revisit the terms of the agreement. And one of the best examples is involving the reported rumor of Melania Trump having to renegotiate her nuptial agreement with ex US President Donald Trump after his victory in the 2016 election. So, although is questionable if President Trump was signing the agreement under his free will.

Alfred Ip  18:06
So, it sounds like it’s very much subject to circumstances and even though the two parties are married doesn’t mean that they are renegotiating or negotiating the agreement under their own free will, they can always come back and say: “oh, I didn’t really want to sign it at that time, but I had no choice”.

Raphael Wong  18:24
That is why it’s very important to have independent legal advice when the parties sign the agreement. The lawyer advising the party has the duty to ascertain whether the parties are actually signing under their free will, and if the parties did not sign under their free will it’s very important for the legal practitioner to stop acting for the parties or insist that he or she must not sign the agreement.

Alfred Ip  18:55
I think it is like having a family doctor, treating you from time to time with the little issues in health. You should have a lawyer who’s looking after you in the course of your life, understanding your situation and provide constant advice and review from time to time. It’s good to have a doctor and a lawyer by you when you are high net worth.

Raphael Wong  19:21
Indeed, I totally agree.

Alfred Ip  19:23
And actually in Hong Kong, there are a lot of expats who live in Hong Kong, but they may come from another country who are much more receptive towards the idea of a nuptial agreement, would you advise them to make the agreement in those countries instead of Hong Kong?

Raphael Wong  19:44
Well, that very much depends on the particular client, obviously. And one thing for sure is that when preparing the agreement, we should state very clearly the party’s intention as to the choice of law and the choice of court. If it is foreseeable that they will spend majority of their marriage live in Hong Kong, then it might be, it might be best if they agreed that the agreement be governed by Hong Kong law, and by Hong Kong courts, especially nowadays that immigration is such a hot topic in Hong Kong, indeed, again, when we were talking about the reviewing the agreement from time to time this should come up when the parties renegotiate the agreements.

Alfred Ip  20:28
And if the parties make an agreement in other countries, they should seek advice over whether such an agreement will be enforceable or valid in the eyes of Hong Kong court, because if they go into divorce, it will be the Hong Kong court who adjudicate whether this agreement is enforceable or not.

Raphael Wong  20:46
This becomes a very technical question, because if the parties for example, stated in the agreements that the agreement be governed by Hong Kong law and Hong Kong courts, when in the unfortunate event that their marriage breaks down, and if they no longer reside in Hong Kong, it is possible that Hong Kong courts have no jurisdiction to deal with the divorce. In that case, it becomes a little bit trickier, but the concept remains that the party should say very clearly in the agreements about the choice of law and choice of court.

Alfred Ip  21:23
Okay, so what are the points that we could take away from this discussion?

Raphael Wong  21:29
If I can do a quick recap? Nuptial agreement is indeed one of the ways to alleviate the parties from costly and heated dispute in the event of a divorce and unlike trust, which is more catered for high-net-worth clients and individuals, nuptial agreements is more accessible to the general public. And although the nuptial agreement is not binding at the moment in Hong Kong, if the agreement is well drafted, and if certain criteria are met, that is entered freely and then the agreement is fair in the eyes of the court, then Hong Kong courts will likely to uphold the agreement. Now, if I may conclude in the end, the best way to avoid a costly and stressful divorce is not to have a divorce at all.

Alfred Ip  22:16
Of course, nobody wants to go into a divorce, but then sometimes, you know, the situation dictates it and it is most stressful to live with someone you do not love anymore. But I think the most important part is how to get out of a relationship in a way that is manageable with a process that put both parties into perspective and communicate with senses and resolve all the issues instead of relying on Hong Kong courts to resolve any dispute before you.

Raphael Wong  22:46
That’s very well said. Thank you so much, Alfred.

Alfred Ip  22:48
Thank you!

22:51
Tune in and listen to more episodes of The HIP Talks podcast by checking the insights section at our website at www.hugillandip.com and our channels on Apple PodcastsSpotifyGoogle Podcasts and Stitcher. They are also available on Hugill & Ip’s YouTube channel. You can send comments and feedback to our email address hello@hugillandip.com. If you found the hip talks interesting, please share them with friends, family and business associates.

 

This podcast is for informational purposes only. Its contents do not constitute legal or professional advice.

Alfred Ip

Alfred assists high net-worth individuals (HNWIs) in handling their wealth-related issues, such as contentious and non-contentious trust and probate, mental capacity, family office, amongst other wealth management matters. He is also a leading Dispute Resolution lawyer with over 20 years of experience in Hong Kong. Moreover, Alfred helps clients with issues regarding Family Law.

All articles by : Alfred Ip
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