Prenups and Cohabitation Agreements – Should You Have One?
It’s probably only worth it when there are substantial assets involved at the start – but it also depends on whether you’re the one with the money! To an extent, the question is academic anyway, because the pre-marital agreement isn’t officially recognised by UK courts. That’s not to say that a judge will automatically throw it out though. And there have been hints from the Government in the last couple of years that it should be given more credence, following a number of messy divorce cases.
At the moment, in this country, a ‘pre-nup’ will sometimes prove persuasive to a court when divorcing couples are arguing about who promised what to whom – but it’s usually only when the marriage has been comparatively short and there are no children involved. And it would certainly be struck out if it were considered in any way unfair to either of the parties, or if it appeared to have been signed under duress.
There are already divorce laws in place governing the division of property, maintenance and the residence of any offspring, which would override much of what might be set out in a pre-nuptial agreement. Currently, the court’s first priority is to look at each partner’s income and assets at the time of the divorce, the length of the marriage, their ages, standard of living and the reasonable requirements of the ‘poorer’ party. The terms of a pre-marital agreement come way down the list of considerations, particularly if it was drawn up a long time before the divorce and circumstances have changed. And, if there are children involved, it may well be ignored altogether.
However, in view of the landmark case of White v White, it still might be worth thinking about for the wealthier among you before you take that walk down the aisle. Particularly if you’re about to enter a second marriage and want to safeguard inherited family money, your business, or your children from a previous relationship. After all, if your partner agrees to abandon future claims to a moderate amount of the incoming assets, he or she can hardly demand the agreement be set aside at a later date without good reason. (It goes without saying that, if you’re the poorer partner and you’re not being offered much – don’t sign!)
Cohabitation Agreements
The rules for unmarried couples are quite different. However, most people mistakenly believe that living together can give you the same rights as marriage. They are wrong – the notion of ‘common-law marriage’ simply does not exist (although a two-year long review of the laws in this area begins in July 2005).
You might think that moving in with your loved one will result in both of you living happily ever after. And, there’s also the added advantage that by pooling your resources, your living expenses should, in theory, prove cheaper. However, if you’re not careful your financial problems may double.
At this heady time your legal rights and the mundane things such as how you’re going to pay the bills, are probably the last thing on your mind. Given the emotional turmoil of setting up home together, you could have a recipe for financial disaster if you don’t sort things out at the beginning. But there are ways around this minefield thanks to a website which offers advice to couples who decide to cohabit.
Advice Now produces a free ‘Living Together’ agreement (applicable to those living in England and Wales only) which should help to protect both partners from whatever might happen to the relationship in the future. And couples are being urged to take advantage of it even if they’ve already been living together for years.
The courts can enforce this type of cohabitation agreement if they choose because they’re seen as binding contracts between unrelated parties. Couples who aren’t married have no legal right to each other’s money regardless of how long they’ve lived together so, if they’re committed but simply don’t believe in marriage, a cohabitation agreement can be a very good solution.
They can save a great deal of heartache should the relationship end and allow couples to split up as amicably and fairly as possible should the worst happen. But they can also clarify issues for couples who may never split up at all. Here are two examples:
Pensions
Pension schemes through your employer will generally pay out a lump sum if you die before you retire and you can choose who you want to get this money. You’ll have nominated your beneficiary when you joined the scheme but can you remember who you nominated and do you now want to change it?
Most importantly, note that while employers may pass on pensions or death-in-service payments to spouses, some do not recognise partners who merely cohabit, so it’s vital that you check this through your HR department.
If you find that they won’t pay out to your partner, Advice Now suggests that you don’t nominate who should get the death-inservice payment at all. That way the money would be paid into your estate when you die and you can then leave the amount by Will to your partner. (This might have inheritance tax consequences, if it increases your estate, so you do need to take some advice from a solicitor or accountant before you decide to do this).
Ownership of house contents
The law is fairly straightforward on who owns what should an unmarried couple split up but it’s usually better to spell it out so there’s no room for argument. For example:
- If you alone paid for something or you inherited it, it belongs to you.
- If you bought something together without distinguishing shares, you own it jointly.
- If you bought something and your contributions were unequal then your share in it will be equal to the contribution you made.
But – and it’s a big ‘but’ – what you do or say to each other at different times can change the above rules. For example, if you buy something but say to your partner ‘this is yours’ or ‘this belongs to both of us’ a court can later regard you as having created ‘a trust’ and can hold you to that promise. Or you may be regarded as having created a trust by implication, which means that something you said or did leads to the conclusion that something you bought is shared or given to your partner. Hence the reason for spelling things out in the agreement.
There are many approaches to money management between couples but the key things are openness and communication and these Living Together agreements should help couples to accomplish it.
More information
Motley Fool is a treasure chest of good advice on everything financial. And it’s written like your everyday person wrote it, not an accountant! Visit www.motelyfool.co.uk and be sure to check out the section for women’s finance.
Useful links
Advicenow, an independent, not-for-profit website providing accurate, up-to-date information on rights and legal issues, is worth a visit if you are thinking about prenups or a cohabitation agreement. (http://www.advicenow.org.uk/)