Prenups Are Not Estate Plans: Why Families Need Their Wealth Planning to Work as One
Proposals to make certain prenuptial agreements legally binding could significantly change the way families approach the protection of inherited wealth.
The Ministry of Justice is consulting on the introduction of so-called “qualifying nuptial agreements”, which, if enacted, could allow couples far greater control over how assets are treated on divorce. For families with inherited wealth, businesses, investment portfolios or trust structures, that could be an important development.
But there is also a danger that stronger prenups create greater misunderstanding.
At iTrust121, we regularly see clients assume that because a prenuptial agreement exists, their wider wealth is somehow “protected”. That is not necessarily the case.
A prenup is fundamentally concerned with the financial consequences of relationship breakdown. It does not automatically determine what happens on death. It does not rewrite a Will. It does not bind trustees. It does not change the ownership of assets. It does not remove inheritance tax consequences. And it does not replace properly structured estate and succession planning. That distinction matters.
Prenups and Inheritance Are Often Confused
For many families, the thinking is understandably simple; A parent wants an inheritance to remain within the bloodline. A child is getting married, a prenup is put in place and the family then assumes that the inheritance is permanently protected.
In reality, family wealth planning is considerably more complicated. An asset may begin as non-matrimonial property because it was inherited, but the way it is subsequently owned, used and managed can become highly significant. Inherited funds may be used to purchase the matrimonial home. investment income may become part of ordinary family expenditure. A family business may provide the household income, property may be transferred into joint names.Trust distributions may repeatedly support the couple's standard of living.
Over time, the distinction between “family wealth” and “matrimonial wealth” can become increasingly blurred. A prenup can record the parties' intentions and may provide important evidence as to how particular assets should be treated. But it should not be confused with the legal structure through which those assets are actually owned, controlled and ultimately inherited.
The Will Still Matters
Marriage and inheritance planning must also be considered together.
One of the most fundamental misconceptions is that a prenup somehow overrides a Will.
It does not. A Will determines how somebody intends their estate to pass on death, subject to the wider law. A prenup primarily addresses how financial resources should be treated if the relationship ends during the parties' lifetimes. They are different documents performing different jobs. There can therefore be a serious problem where someone enters into a prenup but fails to review their Will.
Marriage itself can also have important consequences for an existing Will, which is another reason why marriage should always trigger a full estate-planning review. A family can otherwise find itself with a carefully negotiated prenup sitting alongside a Will that no longer produces the intended result.
Trusts Add Another Layer
The position becomes even more important where trusts are involved. A prenup does not bind trustees simply because one of the beneficiaries has signed it. Trustees must continue to exercise their powers in accordance with the trust deed, their fiduciary duties and the purposes of the trust.
That means the trust documentation, Letter of Wishes, trustee appointments and the family's broader succession objectives should all be considered alongside the prenup. A properly drafted nuptial agreement may provide useful evidence about the nature and intended treatment of trust wealth.
It can help demonstrate that a particular trust was established to preserve family wealth across generations rather than to provide unrestricted capital to a married couple. But it cannot replace the trust itself.
Family Businesses Need Joined-Up Planning
The same applies to family businesses.
A prenup may seek to protect shares in a company or distinguish the value of a business brought into the marriage from value subsequently created. But the wider structure still matters.
Who actually owns the shares?
Are they held personally or through a trust?
What happens on death?
Are there shareholder agreements?
Are there voting restrictions?
Is there sufficient liquidity to avoid shares having to be sold?
What does the Will say?
What happens if the shareholder loses capacity?
A prenup can form part of the protection strategy, but it should sit alongside the corporate, trust and estate-planning arrangements.
Marriage Should Become a Wealth-Planning Trigger
At iTrust121, we believe the most important lesson from the proposed reforms is broader than prenups themselves. Marriage should increasingly be treated as a major wealth-planning event.
When somebody gets married, particularly where significant family wealth is involved, the family should review:
the Will;
lifetime trusts;
beneficiary arrangements;
ownership of property;
business interests;
investment structures;
Letters of Wishes;
powers of attorney;
life assurance;
inheritance tax exposure; and
any prenuptial or postnuptial agreement.
Those documents should not be produced independently and placed in separate files. They should be designed to work together.
The iTrust View
The mistake we see too often is not that families have failed to obtain documents.
It is that they have obtained several perfectly valid documents that were prepared separately and do not actually achieve the same objective.
A prenup says one thing, the Will says another. The trust operates differently again.
The business structure was created years earlier, the Letter of Wishes has never been updated. Nobody has considered what happens if one of the parties dies, divorces, loses capacity or inherits substantially more wealth. That is not comprehensive planning, it is document collection.
The direction of travel towards stronger prenuptial agreements is therefore welcome. Greater certainty around the treatment of wealth on divorce could become a valuable additional tool for families seeking to protect assets across generations. But a stronger prenup should never create a false sense of security.
The real protection comes when the prenup, Will, trust, ownership structure and succession plan are all designed to achieve the same outcome.
That is the difference between having documents and having a strategy.
James Berkeley
Senior Counsel
iTrust121 Ltd