Despite reports to the contrary, the institution of marriage is alive and thriving throughout the world. Tying the knot remains a supreme act of love and commitment, and many studies suggest married couples are healthier, wealthier and happier than unmarried ones.

This state of wedded bliss, though, is not always sustained. There is a growing acceptance of divorce, especially in countries where women are economically self-sufficient. Hong Kong has even been dubbed the ‘divorce capital of Asia’.

“It can sometimes be a delicate conversation to have following an engagement, and it is important to choose the moment carefully,” says Vanessa Duff, a Partner at law firm Charles Russell Speechlys, who advises high-net-worth individuals on all aspects of family law.a

Division of spoils

A prenuptial agreement will normally set out how to divide assets on a future breakdown of the marriage, as well as address the welfare of any minor children. It should deal with pre-marital wealth, and what happens to assets built up during the marriage or received during the marriage from a non-matrimonial source, such as inheritance. Ideally, both parties should have independent legal advice; there should be an absence of pressure or duress; and the agreement should be signed a minimum of 28 days before the wedding.

“Prenuptial agreements are recommended for those who may be entering into a (possibly second or third) marriage in later life and wish to protect their children and assets they have built up in the past,” says Duff. Having such an agreement is crucial, she adds, in cases where one party has significant inherited wealth or a business to protect.

She believes the attitude of the Hong Kong younger generation to prenups is much more accepting and practical today than it was in previous decades, especially for those who legally hold assets on behalf of their parents or relatives. “It is therefore essential to clarify in such an agreement that those assets belong to a third party,” she says.

Pre-wedding planning

All relationships go through tricky spells from time to time, and no one can foretell the future with certainty. A breakdown of trust happens when transfers of assets to third parties are discovered later in the relationship, without any prior discussion or agreement. “It is always better to discuss and agree this in advance with the other party,” she advises.

She indicates this exchange of financial information is part of a wider picture of building up trust in a relationship, where transparency and openness is key, and candidly talking about expectations with regard to working arrangements and who will look after the children.

There are risks on relying on the courts to settle the financial arrangements of a break up. As Duff points out: “That means pre-acquired and inherited assets are also potentially vulnerable. Without an agreement it is difficult to ringfence certain assets and ensure that the interests of children from a former relationship are protected.”

Equal split

“The starting point in Hong Kong in the event of a divorce is for all worldwide assets to be divided 50/50, irrespective of their origin, and there is also a presumption that both parties are to be treated equally and fairly,” says Duff.

“If done correctly, a prenuptial agreement will carry significant weight with the court. Any prenuptial will need to ensure that the reasonable financial needs of both parties are met.”

Duff says the court will only depart from equality if there are ‘good reasons’ for doing so. “Without a prenup, it relies on the lawyers to come up with legal arguments and ‘good reasons’ as to why these assets should not be included in the event of a divorce.”

Legal grey area

Hong Kong-based lawyer Sanjeev Aaron Williams says that a prenup serves as a point of reference for the courts, but cautions that they have the power to review whether the terms are reasonable. He advises parties entering into such an agreement to seek certainty of jurisdiction and governing law.

Ultimately, having a prenuptial agreement provides a couple with a degree of certainty and predictability, rather than leaving it to the court system to decide. It minimises financial anxiety and offers reassurance in the eventuality of an end to their marriage.

In trusts we trust

Another legal mechanism to consider when protecting wealth and pre-acquired assets in the event of divorce is a trust. “Trusts are becoming an increasingly popular wealth-planning tool, especially for high-net-worth individuals,” notes Jocelyn Tsao, a Partner at Withers’ Hong Kong office. “The usual objectives would be to minimise tax, protect assets from potential creditors, and plan for succession

Since most trusts are set up with the primary purpose of estate planning and asset protection, they may not address the contingency of a divorce. Tsao warns of the dangers of this oversight, saying: “Without considering divorce in a trust arrangement, some aspects of the trust setup might render the trust vulnerable to being ‘attacked’ in a divorce situation.”

She points out that the Hong Kong court has the power to vary any nuptial settlement, and it may regard the trust as a financial resource even if it was established prior to marriage. This scenario in case of divorce would render assets held in trust vulnerable to being shared by a divorcing spouse or the divorcing spouse of a couple’s child.

“Hence, more individuals and families who plan to set up trusts now are seeking advice on how to ensure that the wealth held in the trust would be safe from being shared in the event of a divorce,” says Tsao.

Spousal claims

Anisha Ramanathan, a fellow Partner at Withers in Hong Kong, reveals that it is important to get spousal consent before setting up a trust during a marriage so as to demonstrate that it wasn’t established specifically to defeat the legitimate claims of the other party in the event of divorce.

It is possible to re-settle or restructure the trust after it has been set up, though Tsao warns that “such variation may be seen as an attempt to defeat a divorcing spouse’s claim if it is done three years prior to the divorce ¬– in which case the court has the power to set aside such variation.”

The independence of the trustee is another key consideration when establishing a trust, especially if the marriage ends in divorce. It is the trustee who controls the assets in the trust and makes decisions on its administration and asset investment.

“Divorce can impact the trust where proceedings involve either the settlor or the beneficiaries. In either case, the trustees should show themselves to be independent and there may be cost consequences if they act inappropriately,” says Ramanathan. She highlights the landmark 2014 case of Kan Lai Kwan v Poon Lok To Otto, in which the court considered the trustees were not acting independently and decided in favour of the wife.

Nuptial necessities

In an ideal world it is best to have both a prenuptial agreement and a postnuptial agreement in place in terms of protecting your assets in a trust, according to Billy Ko, another Hong Kong Partner at Withers. “As the name postnuptial agreement suggests, such an agreement is signed after marriage, and therefore the possible argument of being forced to sign the agreement under duress and undue pressure becomes less persuasive if the couple has gotten married already,” he says.

He also warns nuptial agreements are not “bullet proof”, and it is equally important for the party(ies) seeking protection to handle their finances properly during marriage. “For this reason, if there’s any particular asset that one would like to protect, it is important that it is ‘ringfenced’ and kept entirely separate from your spouse,” he emphasises.

Every scenario should be considered when one is wealth planning, including the possibility of one of the partners in the marriage losing mental capacity. “In order to avoid this, one could sign an Enduring Power of Attorney to appoint one or more individuals to manage the donor’s finances in the event the donor loses the mental capacity to do so,” he says.