Romance, marriage, the pre-nup and the fairy-tale ending

Introduction

There are few subjects which divide families as much as the introduction of outsiders into the family, and when a gentleman falls to one knee to propose, if he is – or more often his family are - simultaneously planning how cheaply they can get rid of the gold-digger bride when the marriage fails, the romance may stutter: this speaks to the deepest fears of the whole enterprise.

Pre-nup basics

In simple terms, the pre-nup is most commonly used to protect pre-existing family wealth being lost on divorce. The terms of the pre-nup will clarify what both parties agree should happen on divorce, and whilst events (particularly ill health and the arrival of children) impact on the details, these agreements (if drafted properly in the first place) tend to work in court.

Pre-nups are expensive. This is partly by design (by definition, there are two sets of lawyers) and partly by detail, as sorting out who owns what at the start is an essential part of the agreement. It is not an area where it is worth cutting costs, and it is almost universal that, if money is unequal, the wealthy family pays for both sides’ advice. Unlike in most negotiations, all sides want the other to receive good advice as it reduces the risk of later challenge.   

It is possible to do post-nups which can work just as well but have more drawbacks and no advantages.

You will see from the below that pre-nups are, at best, a partial solution to a problem. If your worry is that half or even all of your money will disappear on your children’s life choices, don’t give them the money in the first place.  Most importantly of all, however, if the preconceptions around pre-nups are not to be overcome, you may prefer to keep your money and your views to yourselves rather than to risk destroying your child’s marriage before it starts: it’s only money. Give your children this note and leave it to them.   

The story

Here is one story of a normal (albeit wealthy) family. I have removed any personal comment from the main thesis so that you can apply it to your own circumstances.

The family and the romances

Molly and David (M&D) have just sold their business for £10M, which they don’t need, and are worried about losing most of this as inheritance tax when they die.  They have a house with no mortgage, pensions to live on, and all is very comfortable. They have two sons, Tom and Jerry, who are each engaged. M&D’s advisers recommend both boys to get a “pre-nup”, which Tom does, and Jerry declines to do. The terms of Tom’s pre-nup are pretty standard in that on divorce, assets built up during the marriage are to be split equally, but other assets (both premarital and inheritances) are protected.

With Tom’s assets protected from divorce, M&D are happy to pass money down to him and give Tom his share, £5M. Tom purchases a £5M house. Without the same protection, M&D will not risk losing 50% of the money should Jerry divorce and instead buy the next-door house (also £5M) in their own names for Jerry, who lives there rent-free. M&D adjust their Wills so that on the second death, all goes to Jerry, Tom having had his share.    

Each of Tom and Jerry has children. Whilst Tom can afford private school, holidays etc. from earnings (and a mortgage on his house) without help from M&D, Jerry would need a lot of help and because M&D want to be fair, and M&D’s adviser has warned them of the dangers of allowing Jerry and Jerry’s family to be financially dependent on M&D, the two sets of grandchildren lead very different lives.

Time passes, and David dies, leaving his estate to Molly. Molly remarries and, on her death, leaves all her money to her new husband (or to charity): the upshot is that Jerry and his family receive nothing and are evicted, whilst Tom has a by that point £20M house.

Conclusion - so far

Everyone knew what they were signing up to, and no complaints.

Adding the personalities

Tom is a weak character. His wife is a nasty piece of work and has absolutely no intention of leaving him without a good chunk of cash.  20 years into the marriage, Tom dies (perhaps of natural causes!), leaving his money to his wife, who sells the house, abandons the children and moves to Spain. The fact is that giving him £5M outright was the wrong thing for M&D to do, pre-nup notwithstanding.

Jerry is a saint. He has no interest in money and was keen that his parents should enjoy their money rather than handing it on anyway: he would have given most of any inheritance to charity. Jerry is quite happy that Molly has found someone to make her happy in her old age.

Unfortunately, Jerry’s wife, whilst also initially lovely, is not at his level of saintliness. Having seen her children struggle whilst Tom’s had the best of everything, she is unenthusiastic about the prospect of being made homeless and divorces Jerry.  A year later, her parents die and leave her comfortably off.

Molly’s new husband, on her death, is distraught. He kicks Jerry out, sells the house and moves to Spain. Jerry dies in the gutter.   

The fairy-tale ending (as promised)

Coincidentally, Tom’s ex-wife is running a bit low on funds and meets Molly’s widower at a lonely hearts club. They marry, and at least one of them lives happily ever after.

Conclusion overall

There are multiple variations of the above story, but the general theme is a constant. It’s not that M&D prefer Tom’s choice of wife to Jerry’s, nor that Jerry loves and trusts his wife more than Tom.  Let’s remove the emotional bits and stick to facts: if Jerry and his wife had gone with the pre-nup, they might have lived happily and wealthily ever after (or, being a saint, he might have given all his money to Tom’s widow when she was running low on funds!).

But the fact is that the increasingly elderly parents are choosing between giving money to their children (and risking 50% or more going on divorce or death) but avoiding inheritance tax (currently 40%) and deferring the decision. Deferring the decision normally means accepting the inheritance tax.

 In much the same way as writing a Will or taking out life insurance does not mean planning to die, the pre-nup just makes financial life on wealthy marriages a lot easier. If addressed properly, it incidentally can also make the wealthy family a lot less suspicious of the “gold-digger”, albeit that, as the story above shows, not always rightly so!

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