Divorce has been in the news a good deal recently, partly due to the handing down of two judgments by the House of Lords: Mr Miller was ordered to pay his wife a lump sum of £5 million after a marriage of just under three years with no children.  Mr and Mrs McFarlane had three children and had been married for sixteen years.  They agreed to divide their capital equally, and Mr McFarlane will be paying spousal maintenance of £250,000 per annum to Mrs McFarlane for the rest of their joint lives, unless she remarries or the Court makes a further order.

by Brigid Turner, founder of Brigid Turner & Co.

Mr Miller and Mr McFarlane are no doubt taking advice as to how best to manage their finances in order to absorb these hammer blows.  Miller and McFarlane are extreme and unusual cases, hence the media interest, but on any divorce or separation it is sensible to obtain expert financial, as well as legal, advice on the implications of the division of marital property, either by agreement or by order of the Court.

In financial terms, there are a number of stages in a divorce: disclosure, negotiation (and hopefully reaching an agreement) or order, the implementation of that agreement or order and then looking to rebuild financially.

Disclosure and negotiation

The husband and wife in divorce or separation proceedings are both required to give full and frank financial disclosure.  A financial planner can obviously help with this, for example:

• By providing an independent and professional statement of the finances (more likely to be accepted by the spouse’s advisers)
• By advising on the best way to divide the assets
• By calculating the CGT and other tax implications of the sale or transfer of assets, to ensure that one party is not left with a large tax liability after the agreement or order has been approved by the Court

Agreement/order

Following a negotiated agreement or the decision of the Court, a spouse is likely to end up on the paying or receiving end of one of the following orders:-

• Lump sum or property transfer
• Maintenance (capitalised maintenance)
• Pension share

Lump sum

Specialist advice should be sought as to the best and most tax efficient method to raise a lump sum or otherwise transfer matrimonial assets.

The spouse receiving the lump sum should take advice as to how it should be invested, either for capital growth or to provide income at a required level if there is a capitalised maintenance order, see below.

Maintenance

Maintenance is usually paid from the payer’s monthly income, but consideration should be given to achieving the most tax efficient method of payment.

A capitalised maintenance order can be relevant in order to secure a clean break even when there is an element of maintenance required.  A calculation is made, sometimes referred to as a Duxbury sum, which is intended to identify the lump sum needed in order to provide the wife (usually) with an annuity of an agreed or ordered sum for the rest of her life.  There is an element of discount to allow for capital growth and additionally by way of compromise, since it is often the wife seeking the capital sum rather than annual maintenance.  A financial planner can assist in the calculation of the capital sum required, and a specialist matrimonial lawyer will advise on the pros and cons of an ongoing maintenance order versus capitalised maintenance, for example the likelihood of remarriage which would bring an end to an ongoing maintenance order.

Pension sharing orders

A pension sharing order requires the trustees of the pension scheme to carve an agreed or ordered percentage out of one spouse’s pension, and transfer it into an entirely separate fund in the name of the other spouse.  The legislation in respect of these provisions came into effect about six years ago, and was welcomed on behalf of wives who are still in the majority as the receivers of a pension share.  The pension share is preferable to the previous legislation, since a pension share sets up an independent pension for the wife to which she can contribute, and from which she can draw in the future, independently of the husband’s circumstances.  Pensions are complex as each scheme is unique and runs to its own rules, and specialist advice should always be sought as to the merits of seeking a pension sharing order, the true value of the pension, the rules of the scheme and the best company with which to place the newly acquired pension share.

A husband who has lost what is likely to be a significant proportion of his pension will need to consider how to rebuild, by maximising his contributions, and again specialist advice should be sought.

The newspapers and chatshows are likely to continue to debate the merits of marriage and the division of assets on divorce, and several matrimonial lawyers have already quipped that if someone is thinking of marrying, they would be wise to choose someone richer than themselves.  For the wealthier spouse, the English Court does seem to be developing a reputation for being the worst forum in which to divorce, at least in Europe, and some predict that, at least until pre-nuptial agreements become enforceable, marriage will be on the wane.  However, it may be that there is nowhere to hide for the wealthy if at least some of the matrimonial rights and responsibilities are extended to cohabiting heterosexual as well as same sex couples as is now being considered by the Law Commission.  Specialist legal and financial advice should and could be sought on the likeliest ways to protect wealth should the worst happen.

As a final note, it is always worth considering a pre-nuptial agreement.  They are not yet enforceable in the English Courts, but their existence is always a factor which is taken into account, and they can be given significant weight as a legal contract between two consenting adults if several fundamental checks have been applied.  Briefly, they are that before signing each party must exchange full and frank financial disclosure, each party must have had the benefit of independent legal advice, there must be sufficient time for consideration and cooling off in advance of the proposed wedding and thought should be given to the financial effect of the arrival of children if appropriate; a pre-nuptial agreement signed even perhaps in the month of the wedding is unlikely to be considered sound.  The pre-nuptial agreement must make adequate provision for both parties and for any children, and there should be review periods built into the agreement to ensure that it remains relevant and capable of being relied upon.

One other advance protection system to consider is to establish trusts to separate, and to keep separate, capital built up in advance of the marriage or cohabitation.

So the outlook is not entirely bleak and particularly not so for specialist advisers, since the wise will seek advice perhaps even before committing to a relationship, and certainly at the first signs that the relationship is breaking down.

This article has been written by Brigid Turner of Brigid Turner & Co. The views expressed do not necessarily represent those of Evolve. You should contact a suitably qualified lawyer before entering in to any of the arrangements described above. Divorce settlements/agreements are not regulated by the FSA.