Parents who have given their children money want to protect their investment in the event of divorce
Lawyers are reporting an increase in inquiries for prenuptial agreements from people whose parents have given them money to help to buy a home. Parents want to make it clear, in a legal document, that they want the money to stay with their child if a marriage ends in divorce.
Such parental prompting is thought to be one factor in the growth of the popularity of prenups. Helen Pidgeon, a family lawyer, says that inquiries have grown at her practice by 60 to 70 per cent in the past few years. And with speculation over the financial structure of the marriage of Angelina Jolie and Brad Pitt likely to intensify in the coming months, our familiarity with prenups is only going to increase.
A desire to control where parents’ gifts go in the event of divorce has increased, partly because more are giving money to their children. A study by Legal & General in July suggested that the Bank of Mum and Dad would lend or give £5 billion this year. Parental concern also reflects the rise in divorce rates — more than half of marriages end in divorce.
For parents wanting to help their children and safeguard their money there are two options, and both have limitations. Giving someone money to buy a home is tax efficient, but lending it gives you more control.
If you give the money, the rules state that no inheritance tax needs to be paid, as long as you live seven years after making the gift. The downside is that some or all the money could be taken away from your child during a divorce.
If you lend money, however, a declaration of trust can be drawn up, which is legally binding, but you will end up spending an awful lot of money in tax. In the eyes of the law you will be considered to own a share in the property and you may be liable for the 3 per cent stamp duty surcharge on second- home properties when it is bought and capital gains tax when sold.
Prenuptial agreements are a statement of intent or aspiration about what people want to happen with their finances if their marriage breaks down, says James Carroll, a partner of family law at Russell-Cooke. “I liken it to an insurance contract. You don’t think your house is going to burn down, but you pay for an insurance policy in case it does. It doesn’t tell a judge what to do, but it can lend heavy influence. If it’s fair, appropriate and the children are going to be provided for, it’s going to be upheld.”
Prenups are complicated documents and usually cost between £3,000 and £5,000, but can be as much as £20,000 if complex, as one imagines would be the case if there were a Jolie/Pitt prenup.
To be effective they have to be fair; the prenup has to be drawn up at least a month before getting married; all finances have to be disclosed; and both parties need to have access to an independent solicitor.
I liken these agreements to an insurance contract
Parents are increasingly asking for agreements clearly stating that in the event of a divorce they would like it recognised that money given by them is part of their child’s inheritance. Ms Pidgeon says that it is also possible to get a post-nuptial agreement — perhaps when parents are helping a couple buy a larger home after having children. Unlike prenups, the Supreme Court has upheld that if all the right criteria have been met in their preparation they are binding. “Post marriage you are not under duress; you’ve not got someone the day before the wedding saying, ‘sign here.’ ” she says.
A declaration of trust, meanwhile, is used when parents loan money to children. Legally binding, it costs about £1,500 to draw up. Mr Carroll reports that most families start off intending to get a prenup, but half end up with a declaration of trust, which can be used whether people are married or not.
Mr Carroll estimates that only one in 25 parents who lend money document it legally. “Most give the money because it’s nice and friendly, but if the marriage doesn’t work out there can be horrendously difficult conversations. It can destroy families. A divorce in which parents become involved can be more expensive and stressful.”
While prenups are no longer an unknown quantity confined to US celebrities, they are still fairly rare. Mr Carroll draws up 15 to 20 a year compared with one or two a decade ago.
Geoffrey Todd, partner of Boodle Hatfield law firm, says that people seem to balk less at being asked to enter a prenuptial agreement. “It’s often easier if the children can say, ‘I’m sorry, but my parents require this.’ ”