Within courtroom dramas the splitting of the financial assets can be overplayed because it is so often perceived as esoteric. The reality of course is far from the TV scripts; the splitting of financial assets are one section of a multi-faceted agreement, the part it plays is unique to each divorce and the focus should always remain on achieving a full and fair settlement between two parties. However, ensuring that all parties are fully briefed in the financial jargon within a divorce is essential, not just for the divorce process but to guarantee that each party is confident in their financial standing moving forward, adapting to a new way of life.
This interview follows on from Part 1 where Grainne outlines the divorce process. Here Jenny asks Grainne to talk through the financial aspects of the divorce process, what is needed and considerations which are taken, dispelling financial uncertainty.
What are the basics of Financial Disclosure?
When you apply for a divorce, a financial disclosure should be given by both parties. Full financial disclosure is where you and your spouse provide each other with a complete disclosure relating to your financial circumstances. This disclosure should be full, frank, clear and honest.
If you are in financial remedy proceedings, you will be required to provide a full financial disclosure in a comprehensive document known as Form E. You and your spouse will then exchange Forms E on a set date. If you are not in financial remedy proceedings, your solicitor will advise you to complete and exchange Form E, albeit voluntarily.
What does Form E consist of?
Form E requires you and your spouse to provide a vast array of details in respect of your financial circumstances, including details of the family home, any other property, bank accounts and investments, life insurance policies, valuable personal belongings, liabilities, business interests and directorships, pensions, employment, employment income, self-employment or partnership income and income from other sources such as rent or benefits.
Form E also requires you and your spouse to set out your weekly, monthly or annual income needs and your capital needs, such as whether you require a property to live in and how much this will cost.
Finally, Form E requires you and your spouse to provide a narrative of your respective financial situations, such as details of any significant changes to assets or income, details of the standard of living you enjoyed, contributions you made, your earning capacity, inheritance prospects, retirement plans and so forth.
In addition to the above, you and your spouse will need to gather documentary evidence in support, such as market appraisals, mortgage statement, bank statements, payslips and so on.
What is the point of Form E?
Your solicitor will need a complete picture of yours and your spouse’s financial circumstances to properly advise you as to what a fair and appropriate financial settlement looks like, and to make an appropriate offer to settle on your behalf. Whilst you may think you know what your spouse owns, your solicitor cannot rely on this and neither should you.
Once you are in financial remedy proceedings, a judge, just like a solicitor, will need a complete picture of yours and your spouse’s financial circumstances. A judge at the Financial Dispute Resolution Hearing (FDR) needs this information to provide you with an indication about the likely financial settlement a judge would impose on you if the case does not settle and proceeds on to a Final Hearing. A judge at the Final Hearing will then need this information to impose an appropriate financial order on you.
What is the difference between a marital and non-marital asset?
Matrimonial assets are assets acquired during the marriage by the labours or endeavours of one or both parties. This includes the family home regardless of when or how or by which party it was acquired, as it usually has a central place in any marriage.
Non-matrimonial assets are assets that have been acquired by one of the parties outside of the marriage, including inheritances, gifts and property which either party brings into the marriage with them.
Matrimonial property is likely to be shared equally between the parties, whereas non-matrimonial property is likely to be retained by the contributor, particularly where the marriage is short, or shared unequally in favour of the contributor on the basis that it represents an unmatched contribution from them.
However, the distinction between matrimonial and non-matrimonial property will carry little weight, if any weight, in a case where the parties’ financial needs cannot be met without resource to the non-matrimonial property, as needs have priority. The distinction may also carry less weight if the non-matrimonial property is or was of insignificant value, was acquired many years ago or has been intermingled with other matrimonial property during the marriage, for example, if inheritance monies were used to purchase a property in joint names or were moved into a joint account.
The above said, the court’s approach to non-matrimonial property is not defined by one clear principle. The court will need to consider all of the circumstances of the case and whether the distribution is fair; fairness being the court’s overarching objective.
Will a future inheritance be considered or is this safeguarded?
The court rarely takes into account prospective future inheritances, as it is difficult to predict how long a person will live and how large the potential benefit will be.
The position may be different if the inheritance was imminent or would make a substantial difference. If this was the case, the court may adjourn proceedings until the inheritance is available for consideration.
The position may also be different if one party receives a substantial inheritance after the court has made a final order, in which case the other party may decide to apply back to the court on the basis that an event has occurred which invalidates the fundamental assumption of the order made (a Barder event).
How are the assets likely to be split?
In dividing assets on divorce, a judge must consider all of the circumstances of the case, with first consideration being given to the welfare of any minor child or children of the family. A judge must then consider a range of specific statutory factors contained within the Matrimonial Causes Act 1973, often referred to as the ‘section 25 factors’. In summary, these are:
- the income, earning capacity, property and other financial resources which each of the parties has or is likely to have in the foreseeable future;
- the financial needs, obligations and responsibilities which each of the parties has or is likely to have in the foreseeable future;
- the standard of living enjoyed by the family before the breakdown of the marriage;
- the age of each party to the marriage and the duration of the marriage;
- any physical or mental disability of either of the parties to the marriage;
- the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family; and
- the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it.
Upon considering all of the above and the principles of needs, sharing and compensation established in case law, a judge will calculate an appropriate financial settlement. A judge will then cross-check this settlement against the principle of ‘fairness’, which is the court’s overarching objective. But what does ‘fairness’ mean? Well, rather unhelpfully there is no set definition, and even more unhelpfully it has been described by a judge in two important family law cases as an ‘elusive concept’ and that ‘fairness, like beauty, lies in the eye of the beholder.’
It is therefore very difficult to predict at the outset how assets are likely to be split. Judges have a wide band of judicial discretion and different judges can reach a range of possible solutions.
In general terms and in regards to capital, the starting point in a long marriage is an equal division of the matrimonial assets, and the court would require compelling evidence to depart from equality. All the assets held jointly or by parties individually would be considered to form part of the pot to be divided. However, the courts do draw a distinction between ‘matrimonial assets’ (those built up by the parties’ endeavours during the marriage) and ‘non-matrimonial assets’ (those that have come from outside the marriage – either as inheritances or pre-acquired or post-acquired assets). One would scrutinise the nature of the non-matrimonial assets and decide what part they should play, in light of the parties’ needs.
Child maintenance
Turning to child maintenance, if you can agree the child maintenance, then it can be incorporated into a consent order. If you cannot agree then the court no longer has the ability to decide the issue (save in exceptional cases, such as when the income of the payer is extremely high) but instead a government agency, The Child Maintenance Service now deals with the assessment and collection of child support. You cannot contract out of child support so assuming you are the main carer, your spouse will have a child maintenance liability.
In addition to child maintenance, spousal maintenance may be payable, especially where one spouse’s income is far higher than the others. There is no presumption in terms of an equal split in income. Spousal maintenance is designed to help spouses transition and is driven by your needs. There is no fixed formula and it is a matter of negotiation by comparing your monthly income needs coupled with your earnings. The parties are both expected to exploit their earning capacity and so consideration is given not just to what is being earned but what can be earned. This will become clearer during the financial disclosure process where the parties will need to complete an outgoings schedule so that a reasonable maintenance amount can be negotiated for a reasonable duration.
Pensions
Finally, pensions are an asset to be shared like any other. There is more than one way to deal with pensions on divorce. It is not a simple ‘wife keeps husband’s pension’ or ‘husband keeps own pension’. The parties will need to determine the valuation of the pensions and then decide what to do with them. It is usual that expert advice is sought on pensions as they carry their own complications and peculiarities and even on a direct comparison of “value” often hold very different worth, much like apples and pears. The parties could decide to seek a pension sharing order or offset arrangement. Ultimately, all the circumstances of the case will need to be considered.
There is a ‘prenup’, will this be upheld?
Pre-nuptial agreements are not legally binding in England & Wales. They cannot stop a spouse from applying to the court for financial provision from the other spouse and cannot stop a judge from deciding on the appropriate division of assets on divorce.
That said, pre-nuptial agreements are a relevant circumstance of a case to be considered by a judge. In the Supreme Court case of Radmacher v Granatino [2010], the highest court in England & Wales made it clear that a court should give effect to a pre-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. This essentially means that if a pre-nuptial agreement is drafted properly, it is likely to have a substantial impact on a judge’s decision in many cases.
Breaking the judgment in Radmacher v Granatino [2010] down further, parties entering into a pre-nuptial agreement should consider the following:
1. Is the pre-nuptial agreement freely entered into?
Are the parties entering into a pre-nuptial agreement of their own free will without any pressure? Do the parties feel that they are on an equal footing and freely able to negotiate the terms of the agreement? Have the parties signed the pre-nuptial agreement as far in advance of the wedding date as possible and at least 28 days before the date? What emotional state were the parties in at the time of drafting and signing the pre-nuptial agreement? How old are they? How mature are they? What relationship experience do they have?
2. Do the parties have a full appreciation of the implications of the pre-nuptial agreement?
Have the parties received specialist independent, family law advice from a solicitor in England or Wales? Do either of the parties have a connection with another country and if so, has that party received specialist independent family law advice from a solicitor in that country? Do the parties have all the relevant information material to their decision? Do the parties intend to be bound by the terms of the pre-nuptial agreement?
3. Is it fair to hold the parties to the pre-nuptial agreement?
Has the pre-nuptial agreement provided for the reasonable requirements of any child or children of the family? If the answer is no, it will not be considered fair. Does the pre-nuptial agreement leave one party in a state of real need, whilst the other party is comfortably provided for? If the answer is yes, it is unlikely to be considered fair.
The longer a marriage lasts, the greater the chance the pre-nuptial agreement may not be fair because of unforeseen changes in circumstances, for example the birth of a child, bankruptcy, or long-term illness of one party. It is therefore prudent to include a review clause in the pre-nuptial agreement that triggers a review of the terms upon a significant change in circumstances.
Written in conjunction with Grainne Fahy, Head of Family Law, London & South East, BLM
