When a romantic relationship secured by oaths in the marriage has come to an end, not many couples dealing with divorce could meet an agreement peacefully. Many people have considered bringing in preventive measures such as a family trust or a pre-nuptial agreement in hope of simplifying matrimonial proceedings and protecting certain individual assets. This article would discuss the background of these two tools, and their legal positions in Hong Kong matrimonial law.
A family trust allows a family member (the settlor of the trust) to transfer assets to a third-party trustee so that the trustee, instead of the settlor would hold the legal title (i.e., the ownership) of the assets. Meanwhile, the beneficiaries, who are usually the settlor himself and other family members, would hold the equitable interest of the trust assets and be entitled to enjoy the benefits of the trust.
A pre-nuptial agreement is an agreement entered into by couples before their marriage regarding asset allocation, custody, maintenance, and any other post-separation arrangements. Also, couples are free to enter into a nuptial agreement during the marriage but before separation, which carries a similar effect to a pre-nuptial agreement.
Post-nuptial or a separation agreement is an agreement entered by couples in the course of separation or divorce. Any financial and maintenance arrangements listed in the agreement are deemed valid and enforceable according to s.14 of the Matrimonial Proceedings and Property Ordinance (“MPPO”). The Court in L v C also affirmed the enforceability of a post-nuptial agreement unless a compelling case of unforeseeable circumstances has been raised. In light of the asserted position of post-nuptial agreements, this article would put more emphasis on discussing the legal effects of a pre-nuptial agreement.
2.3. Natures: family trust vs. pre-nuptial agreement
A family trust is a wealth management tool to prevent the dissipation of family wealth and to arrange wealth to descendants in a more sustainable manner. It may be set in the hope of protecting the integrity of certain family assets in the event of divorce, yet it is not refined to such a concern but a substantial step for a family in putting up its asset web.
Meanwhile, the nature of a pre-nuptial agreement would be a voluntary contract intending to bind the couples only. It is established based on both parties’ free will and could be drafted flexibly to hedge on different aspects of marital matters to protect couples’ assets as they wish.
The difference in their nature indicates that each of them fits a different scenario – the former preserves family assets, which involve no beneficiary relationship with the spouses, and passes those assets from generation to generation; whereas the latter arranges particular assets, which are usually associated with couples’ individual benefits and entitlement, in a way desired by the signing parties.
In a marital situation, a nuptial agreement made either before or after separation is more likely to bring greater effects due to the flexibility and extensive scope of contracting terms, while a family trust may only be effective in protecting certain assets from division. Undeniably, the likely impacts brought by a family trust in a series of financial disputes during divorce would rather be less prominent than nuptial agreements due to its nature being a wealth management tool.
Enforceability and impacts on matrimonial proceedings
Despite the transfer of assets title from the settlor to the trustee, the Court may still find trust assets to be matrimonial assets if they belong to ‘the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future’ under s.7 (1) of the MPPO.
Spouse as a beneficiary
Being a beneficiary of the trust would not immediately make the spouse’s interest be held as matrimonial assets. Several factors, including types and terms of trust and track record of the beneficiary receiving benefits, would be evaluated to ascertain such interests would bring the spouse financial resources in the foreseeable future.
For example, a fixed or living trust may bring the spouse determined or regular distributions that would likely be viewed as a financial resource. While in the case of a discretionary trust, the uncertainty in the availability of distributions which depends on the discretion of the trustee and records of the previous dispensation may lead to the preclusion of interest. In Daga v Bangur , the equitable interest of the spouse was not deemed as financial resources as the spouse has never received any benefit, and had no expectation of receiving it.
Spouse as a settlor
Similarly, being the settlor of the trust would not automatically shield the assets from review in matrimonial proceedings. The determinant questions are, as mentioned in Charman v Charman and later approved in KEWS v NCHC :
- what is the extent of the financial assistance provided by the settlor to the spouse? And
- what is the likelihood of such assistance continuing in the foreseeable future?
Looking at all the evidence, the Court should be satisfied that if the spouse were to request the trustee to advance him the capital of the trust, the trustee, acting in accordance with his duties, would on the balance of probabilities be likely to do so.
In Poon Lok To Otto v Kan Kai Kwan , the Court looked at several elements such as terms of the trust, settlor’s letters of wishes, nature of trust asset, and previous distributions to assess the above question. In that case, the spouse set himself as the protector and reserved to him absolute discretion to alter the identities of beneficiaries and power to replace the trustee, showing his intention to occupy a dominant position concerning the administration of the trust. Such a superior position would impose great deference on the trustee who is plainly likely to treat any request the spouse might make for distribution.
In Hong Kong, pre-nuptial agreements, as well as nuptial agreements made in the course of the marriage but prior to separation are not binding on the Court. Yet, the Court in SPH v SA adopted the recent developments in Radmacher v Granatino that nuptial agreements are no longer contrary to public policy, and weight should be given to those arrangements in circumstances where it would be fair to do so. Nevertheless, the Court has irrefutable discretion in determining the appropriate ancillary relief in matrimonial proceedings.
The amount of weight given to the agreement is assessed based on the circumstance concerning the status of the parties during the construction of the agreement. First, the presence of any standard vitiating factors such as duress, fraud, unconscionable conduct, misrepresentation as well as party’s exploitation of a dominant position would in no doubt eliminate the weight to be attached to the agreement. Second, parties’ personal situations, including age, maturity, length of the relationship, and emotional states would also be taken into account to ensure both parties made agreements voluntarily and responsibly. Last but not least, each party should have all the information that is material to his or her decision.
Enforceability: family trust vs pre-nuptial agreement
The Court admits the enforceability of both in marital proceedings. Yet, the impact exerted by pre-nuptial agreements comes in as a spectrum, in which the amount of weight depends on the status of couples during the construction of the agreement. To obtain a considerable weight given by the Court to the agreement, couples have to ensure voluntariness, equity, transparency, adequacy of information and formality in the construction process.
To determine whether the pre-nuptial agreement is free from vitiating factors, Melloy HHJ in V, RHM v V, ES referred to a checklist of questions that were set out in K v K , which was further followed in CM v CRP . The checklist consists of questions such as “did she understand the agreement” “was she properly advised as to its items” and “did she willingly sign the agreement” to see if the agreement was established on a fair and transparent basis. It is believed that couples following such a structured framework in setting up the agreement with appropriate guidance from a legal practitioner would very likely come up with an unvitiated pre-nuptial agreement with more secured enforceability.
Arguably, the binding effect of a family trust is said to be more secure than that of pre-nuptial agreements, given the long-standing establishment of its governing law and the relevant regulations. Yet, it is possible that a meticulously created agreement would largely enhance its validity and enforceability, in particular in the presence of clearer guidance from the Court.
Nevertheless, the Court’s attitudes towards pre-nuptial agreements would not render a ‘fast-pass’ for full adoption of the agreements. In particular, Judges in Radmacher and Luckwell v Limata unanimously held that a nuptial agreement cannot be allowed to prejudice the reasonable requirements of any children. In Luckwell, the Court found that the husband, who held the joint custody of the child, was in need of certain financial resources to fulfill his role as a child’s parent even though the pre-nuptial agreement clearly stated the couples’ intention to segregate their personal assets and seek no financial assistance from each other.
As summarized in LCYP v JEK that although an unvitiated nuptial agreement may pose a certain impact on the distribution of assets, it remains Court’s responsibility to assess needs and compensation. That is, it is still possible that the full endorsement of the couples’ intended arrangement by the Court would be impeded by some contingencies, especially couples’ predicament needs, significant contributions to family and the presence of kids under guardianship.
On the other hand, a thoroughly drafted and planned trust in which the spouse plays no role as either a beneficiary or a protector may preclude certain family assets from the bucket of matrimonial assets and the consequent division. Although the Court would still assess the creation, terms, and distribution histories of the trust to pin down the real ‘beneficiary’ of the trust, still, trust settlor has a high chance to preserve the desired assets through a family trust which has been well-established and independently managed by the trustee.
By looking at the aspect of sharing, a fairly established pre-nuptial agreement would likely be given unneglectable weight by the Court’ when deciding issues on asset distribution though it is still subject to an assessment of the overall fairness. If a spouse would like to secure his or her personal assets and retain the legal titles of those properties simultaneously, a pre-nuptial agreement may come to play and exert a considerable influence despite the possibility of coming under Court’s scrutiny. If both spouses hope to guarantee the integrity of assets that are ready to be passed to their descendants, a family trust might be a better choice due to its assured enforceability.
Still, compared to a pre-nuptial agreement, where a full adoption of it remains uncertain under the complex fairness assessment, a family trust works more effectively in attaining its goal of separating some assets from matrimonial proceedings, in the assumption of alienation of identities of stakeholders of the trust (i.e., beneficiary and protector) from the couples.
Both family trust and pre-nuptial agreement play roles in preserving the assets from division. While a pre-nuptial agreement can be tailor-drafted to cover a wider range of financial and maintenance arrangements, the decision to make full adoption of it and the following ancillary relief is in the hand of the Court. A family trust, in spite of being less impactful, is more likely to exhibit a higher chance of attaining its preservative function through appropriate drafting and execution.