Financial literacy is an essential skill for couples to have, especially in a dynamic city like Hong Kong where financial management is crucial. As couples embark on the journey of marriage, financial literacy becomes a vital cornerstone for building a strong foundation. Understanding financial responsibilities, legal implications, and planning for the future can significantly impact a couple’s relationship and overall well-being. This article contributes to the British Chamber’s theme of ‘Learning in Hong Kong’ and provides insights into the importance of financial literacy for couples, particularly those intending to get married. The article will also discuss the general approach on division of assets in family law and how prenuptial agreements can help parties protect their assets in the unfortunate event of divorce. This education and development of financial skills are necessary for those living and thriving in Hong Kong.
The importance of financial literacy
Financial literacy encompasses the knowledge and skills necessary to manage financial resources effectively. For couples, this means understanding not only their individual financial situations but also how these will interconnect in marriage. Open discussions about finances can enhance trust and transparency, reducing the likelihood of misunderstandings or conflicts.
Prenuptial agreements: a proactive approach
A prenuptial agreement (prenup) is a private agreement entered into by couples before their marriage that outlines the distribution of assets, gifts, inheritance and financial responsibilities during the marriage and in the event of divorce. While discussing a prenup may feel unromantic, it can serve as a protective measure for both partners, building a solid foundation for their future together.
Benefits of a prenup:
- Clarity and communication: Drafting a prenup encourages couples to discuss their financial expectations and responsibilities openly.
- Asset protection: It can safeguard individual assets acquired before marriage, ensuring they remain separate property. Whether it is a family business, real estate or investments, a prenup ensures that your individual assets remain yours, even in the unfortunate event of a divorce.
- Financial security: By clearly outlining financial responsibilities, debts and assets, you create a blueprint for a stable and worry-free future.
- Debt management: A prenup can delineate responsibility for debts, protecting one partner from the other’s financial liabilities.
- Reduced conflict: While contemplating divorce is not pleasant, it is essential to be prepared. By setting clear terms in advance, couples can avoid disputes during a divorce, facilitating a smoother process and managing expectations for the future.
Legal considerations in Hong Kong
In Hong Kong, there is no legislation governing prenups and these do not bind the Courts of Hong Kong. However, courts can give ‘decisive weight’ to prenups, if they meet specific criteria.
- Voluntary agreement: Both parties should feel that they are on an equal footing and able to negotiate the terms without pressure.
- Full appreciation of implications:Parties should understand the terms and implications of signing a prenup.
- Fairness of terms:The terms should not be unconscionable at the time of enforcement, considering all the circumstances of the case.
- Financial disclosure: Both parties are encouraged to provide complete financial disclosure, which is essential for transparency and fairness in the agreement.
- Independent legal advice: Both parties should obtain independent legal advice to fully understand their rights and obligations before signing the prenup.
These steps are crucial for ensuring that the prenup is enforceable and protects the interests of both parties.
Division of assets under Hong Kong family law
Understanding the laws governing asset division in Hong Kong is crucial for couples planning their future. In the event of a divorce, the Courts in Hong Kong follows the “principle of equality” when dividing marital assets. In other words, the starting position is equal division of assets unless there are exceptional circumstances to depart from this principle. Factors such as contributions by the parties, length of the marriage, the needs of the parties and the best interests of the children will have to be considered.
Here are key aspects to consider:
1. Marital vs. non-marital assets
- Marital assets include property acquired during the marriage, while non-marital assets refer to those owned before marriage or received as gifts/inheritances that are not co-mingled as marital assets. If pre-marital assets are relied upon during the marriage, they may be regarded as marital assets and therefore subject to division in the event of divorce.
2. Financial contributions
- Both financial and non-financial contributions (such as homemaking and child-rearing) are taken into account. Recognising the value of non-financial contributions can lead to fairer asset distribution.
3. Future needs
- Courts assess the future needs of both parties, taking into consideration factors such as age, health, and earning capacity. This is particularly important for lower-earning spouses or those who may have sacrificed their careers for the family.
Planning for the future: a joint effort
Couples should regularly visit their financial plans and legal agreements as life circumstances change. When both parties have a strong level of financial literacy, they are more likely to make better financial decisions and will have a greater understanding of their shared objectives. It also means they have the best chance of meeting their goals.
Importance of financial literacy
Financial literacy can help with understanding what type of investment you may need for your goals and timeframes. For example, if a newlywed couple is hoping to buy their first home together in the first couple of years of marriage, allocating funds to cash savings to aid the purchase is likely the best option to achieve their shorter-term objective. Whereas if their focus is to build up their retirement pot to utilise in the next 15 to 20 years, they should have an understanding of longer-term investment strategies such as a diversified portfolio of equities.
When both parties are financially literate, it fosters an equal environment of understanding, sometimes referred to as “the power of two”. If one spouse were to be the only one in the relationship to understand the finances and were to pass away first, it can often leave the surviving spouse in a stressful and confusing situation. Having that equal financial literacy reduces stress and anxiety for both and allows for better planning and goal setting.
Tips on how to be more financially literate
- Engage with a financial planner: Working with a financial planner can significantly enhance a couple’s financial literacy. Having joint meetings with financial planners to discuss shared goals ensures both parties are aligned and offers an opportunity to ask questions and improve their understanding of financial issues, which will improve their ability to receive accurate advice that is bespoke to their needs.
- Use of financial tools: A financial planner can employ tools such as cashflow forecasting to illustrate a couple’s financial plans over a timeline, explaining what is needed to achieve those objectives and when.
- Communicate openly: Maintaining open communication about finances is essential. Regular discussions help both parties stay informed and engaged in the financial planning process.
- Seek professional advice: in addition to financial planners, consulting family lawyers can empower couples to navigate their financial landscape confidently, ensuring a harmonious partnership for years to come.
By fostering financial literacy and maintaining open communication, couples can work together to secure a financial future.
The article was published by The British Chamber of Commerce in Hong Hong
The information provided within this presentation is of generic nature, which is not specific to your personal circumstances and should not be taken as advice or recommendation. Individuals must not rely on this information to make any financial or investment decision. Before making any decision, we recommend you consult your financial planner to consider your particular investment objectives, financial situation, and individual needs. The opinions or views expressed by the invited author (Kajal Aswani, Hugill & Ip) are the author’s own and Progeny does not endorse them in any way.
