Prenuptial agreements: clarity requires ongoing maintenance

Prenuptial agreements are often chosen to provide security. The idea is clear: what is mine remains mine. Yet, in the event of a divorce, it often turns out that the legal implications are different from what was expected.

This is usually due to three elements in the agreement: the periodic settlement clause, the final settlement clause, and the way in which income is defined.

The periodic settlement clause
Under a periodic settlement clause, partners agree to share their remaining income with one another on an annual basis. The definition of ‘income’ is set out in the deed. This may consist solely of salary, but may also include business profits or dividends.

In practice, this annual adjustment is rarely carried out. It is put off or simply forgotten. In the event of a divorce, this can have serious consequences. If no regular adjustments have ever been made, the accumulated assets may still be regarded as joint property, even if they are held in the name of just one partner.

The final settlement clause
A final settlement clause stipulates that, upon the dissolution of the marriage, the assets will still be divided in whole or in part. This may apply only in the event of death, but may also apply in the event of divorce.

Many people believe that their private assets remain fully protected. However, a broadly worded final clause may result in assets that have been regarded as private for years still having to be shared.

The concept of income
The definition of income is often decisive. Does it cover only wages, or does it also include profits, bonuses and dividend payments? This distinction can be particularly significant for entrepreneurs and directors/major shareholders.

A broad definition of income means that more capital generated from income is subject to a set-off obligation. This is not always fully appreciated in advance.

Making informed choices means reviewing them regularly
Prenuptial agreements are not a one-off decision. They require ongoing attention. This is particularly true as assets grow, businesses are built up, or income levels change.

Those who are aware of what has been agreed and review it regularly can avoid surprises. Clarity comes not only from drawing, but above all from understanding the consequences.