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 How do prenuptial agreements work?

How do prenuptial agreements work?

Overview

A prenuptial agreement is a legally binding contract entered into between two people in advance of their marriage. A prenuptial agreement has the main purpose of ring-fencing assets brought to a marriage. It ensures that in the event of a separation, the ring-fenced assets are not included in the definition of matrimonial property as narrated in the Family Law (Scotland) Act 1985. It is common for the party to the marriage who has assets and wealth to protect, to seek advice in relation to a prenup. However, it can also be the case that both parties to a marriage wish to protect assets and wealth. It is important that appropriate and specialist legal advice is sought to ensure that a prenuptial agreement accurately reflects the parties’ wishes prior to marriage.

Introduction to Prenuptial Agreements

A prenuptial agreement is, in its simplest terms, defined as an agreement made by a couple before they marry and which narrates the ownership of their respective assets in the event that the marriage breaks down in the future.

A prenup has the purpose of clarifying ownership of assets in advance of marriage. It seeks to protect assets and wealth owned prior to marriage so that in the event of separation, there is less ambiguity about how assets are to be divided upon separation.

Common reasons why couples choose to create a prenup

A party will commonly choose to enter into a prenuptial agreement where they have acquired assets and wealth prior to marriage which they wish to protect in the event of separation.

One party may have significantly more assets and wealth than the other prior to marriage or alternatively, both parties may bring assets and wealth to a relationship which they wish to protect in the event of separation.

A prenuptial agreement is also commonly considered where a party has an interest in a family business and they wish to protect that wealth from a separation and divorce. A party may wish to avoid any impact on a business/company in which they have a significant role should they separate and divorce in the future.

Benefits of prenuptial agreements

A prenuptial agreement helps protect both parties’ assets in the event of a future divorce.

The main benefit to parties to entering into terms of a prenuptial agreement is that it provides the parties with certainty and clarity over how assets will be divided in the event of their separation.

It is important when seeking specialist legal advice about entering into terms of a prenup agreement to be advised of what would happen on separation and divorce in the event that there was no prenuptial agreement in place.

Whilst matrimonial property is defined as property acquired during the marriage with the exception of gifts and inherited funds from a third party, it can become more complicated where property owned before marriage, gifted or inherited property, changes form during the marriage. In this situation, the property can become converted into matrimonial property. A prenuptial agreement can be drafted to meet the individual circumstances of the parties.

A prenuptial agreement can have the benefit of reducing conflict parties in the event of divorce and separation. Separation and divorce is a challenging time both financially and emotionally for parties. Where parties have a prenuptial agreement in place, they can reduce conflict and legal expense in resolving the financial matters of their separation.

Common misconceptions about prenuptial agreements

In Scotland, prenuptial agreements are commonly entered into between couples in advance of their marriage. They are not just used in other jurisdictions e.g. the United States.

Prenuptial agreements are not just for wealthy individuals bringing significant assets to a marriage. They can be used to protect any assets owned prior to marriage, inheritance or gifts from third parties of whatever value to minimise uncertainty in the event of separation.

Where parties enter into terms of a prenuptial agreement in advance of marriage, it does not mean that there should be distrust in a relationship. Parties enter into a prenup from the starting point of transparency. They are both required to disclose their assets prior to signing the prenup. It is a strength in the parties’ relationship that they are able to discuss financial matters in advance of a marriage.

Who can create a prenuptial agreement?

A prenuptial agreement should be drafted by an experienced family law solicitor who can fully advise a party of the effect of an agreement, what should be included in an agreement and address any potential complexities. Consideration should also be given to the potential for a prenuptial agreement being challenged in the future.

What can be included in a prenup?

A prenuptial agreement will most commonly narrate the details of the parties entering into the agreement, their date of marriage and the specific assets they wish to protect from being included as matrimonial property in the event of separation. A prenuptial agreement will list ‘Separate Property’ held by each party prior to marriage and narrate how the separate property is to be treated on separation, including where separate property is used during the period of marriage to partially fund property which could be deemed to be classed as matrimonial property.

How prenups are created and signed?

A prenuptial agreement should be drafted by an experienced family law solicitor. It is important that both parties seek separate and independent legal advice. A family law solicitor cannot draft a prenup on behalf of both parties, only one of the parties. One solicitor will draft the agreement and the other solicitor will discuss with the other party and make any revisals required until consensus is reached on its terms. It will thereafter be signed by both parties, ideally in the presence of their solicitor.

When a prenup takes effect?

A prenuptial agreement takes effect when it has been signed by both parties and upon their marriage. It is entered into in anticipation of marriage. The marriage must therefore take place for the prenuptial agreement to take effect.

Post-Nuptial Agreements

A post-nuptial agreement is the same as a prenuptial agreement with the only difference being it is entered into after the parties are married.

When to consider a postnuptial agreement

A post-nuptial agreement is often considered where parties do not seek advice in sufficient time in advance of a wedding.

Where parties attempt to enter into a prenuptial agreement too close to the date of their wedding, they should be advised that this increases the chances of the prenuptial agreement being challenged in the future on the basis that it was unfair or prejudicial to one party as they did not have a reasonable period of time to seek legal advice and consider its terms.

In these circumstances, a post-nuptial agreement can be entered into in the same terms as the parties would wish to narrate in a prenuptial agreement without the risk of it being challenged. It is important to be aware that there is an element of good faith required by the parties when considering entering into a post-nuptial agreement as the parties will already have married by the time of its signature.

A post-nuptial agreement can also be considered where circumstances change after getting married, even many years into the marriage. A common example is where a large sum of money is inherited from a third party which is to be used to partially or wholly fund a property purchase or reduce borrowings on a mortgage.

How to create a postnuptial agreement?

A post-nuptial agreement should be drafted by an experienced family law solicitor. It is important that both parties seek separate and independent legal advice. A family law solicitor cannot draft a post-nuptial agreement on behalf of both parties, only one of the parties. One solicitor will draft the agreement and the other solicitor will discuss with the other party and make any revisals required until consensus is reached on its terms. It will thereafter be signed by both parties, ideally in the presence of their solicitor.

Prenuptial Agreements and Legal Advice

Whilst it may be tempting to ‘cut corners’ and reduce legal fees which will be incurred when seeking specialist advice from a family law solicitor, this should be avoided. A party wishing to enter into terms of a prenup should not attempt to draft a prenup on their own or seek to rely on ready-made templates. A prenuptial agreement is an important legal document which should be carefully considered taking account of the individual circumstances of the parties. There is no ‘one size fits all’ formula which can be applied to entering into terms of a prenuptial agreement.

Drawbacks of Prenuptial Agreements

There are no drawbacks to entering into a prenuptial agreement other than the potential for the validity of the agreement to be challenged in the future. However, this is where it is crucial that specialist legal advice is sought to ensure that there is limited scope for the agreement to be challenged. A properly drafted agreement which meets certain requirements when it is entered into, will very likely be upheld were it to be challenged in a Scottish Court.

In order to minimise the risk of a prenuptial agreement being challenged, it is crucial that:

  • There is no pressure on parties to sign the agreement;
  • Both parties have had the opportunity to take separate and independent legal advice before signing;
  • The terms of the agreement must be fair and reasonable when it was entered into.

Harper Macleod and Prenuptial Agreements: Why Choose Us?

At Harper Macleod LLP, we have family lawyers based in all of our offices across Scotland – Glasgow, Edinburgh, Inverness, Elgin and Lerwick.

We have a team of experienced family lawyers, including lawyers who are accredited by the Law Society of Scotland in family law.

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Call us for free on 0141 227 9545 or complete our online form below to submit your enquiry or arrange a call back.