Dividing the spoils

Custody of children aside, when divorce looms the most acrimonious disputes tend to centre on how to share the family assets and also the future income of the higher earning partner.

In the past, the main breadwinner was often awarded the bulk of both the assets and anticipated future income on the basis that he or she generated the wealth. However, two high-profile House of Lords rulings in May this year set a new precedent where the division of assets and future income swung in favour of the lower earning partner in ‘big money’ marriage break-ups.

Under UK law, a marriage or civil partnership is a legally binding contract. Divorce (or dissolution in the case of civil partnership) formally severs this contract. In preparation for the financial settlement, all UK and overseas matrimonial assets – including the family home, pensions, investments and the future income stream – go into the melting pot and must be valued and divided in a fair manner. This must take into account, among other factors, earnings potential, lifestyle and the cost of raising any children from the marriage.

While few medical practitioners would put themselves in the same category as film stars, footballers and financial high fliers, experts believe that the Miller vs. Miller case, which did not involve any children, set precedents that could affect the majority of couples ending their marriage or civil partnership in future.

The case focused on available future income rather than financial need. Alan Miller, who is reputed to earn £1m a year including his bonuses, had offered £1.3m as a one-off settlement. Even though the marriage only lasted a few years, Melissa Miller, his former wife, demanded and received £5m as her settlement to compensate her for the loss of the lifestyle associated with marriage to one of the city’s top fund managers.

Although there were some very specific factors in this case, not least the fact that Mr Miller enjoyed phenomenal growth in his wealth during their short marriage, this case did represent a change in previously established thinking.

The second case of relevance is McFarlane vs. McFarlane. The McFarlanes married in 1984 and divorced in 2000, but it was not until May this year that Julia McFarlane won her appeal. Her argument was that when the couple married they both had high-flying careers – she worked for a law firm and he for an accountancy firm – but Julia gave up her career to raise their three children. The point of dispute in this case was not the division of the assets but the future income Julia would receive for the children (including school fees of £20,000 each per annum) and for herself.

She won her case and now can expect to receive a big sum for the children – a point that was not disputed – and £250,000 per annum for herself during the couple’s joint lives or until she remarries. Earlier court decisions had reduced Mrs McFarlane’s future claim on her ex-husband’s income, and then reinstated it at the above rate but only for five years.

Of course, it is always dangerous to draw wide generalisations from cases with specific and unusual circumstances, but these decisions do give an indication that lifestyle will be taken into account in a divorce settlement, particularly where one partner has given up a successful career in order to look after the family. Importantly, the division of assets and future income is likely to reflect any significant increases in the main breadwinner’s earnings during the marriage.

So where does this leave the divorcing medical practitioner? Clearly expert legal and financial advice is essential. Sharing future income will always be contentious but when it comes to the family’s assets the difficulty is two-fold – the valuation and the way the division is to be implemented. In most marriages the two most valuable assets tend to be the family home and the main breadwinner’s pension scheme.

In the past the courts frequently awarded the family home to the lower earner and left the higher earner with their pension. The problem here was that, while the higher earner could look forward to a financially secure retirement, they had no assets with which to buy a new home.

Fortunately the law has changed on pension rights and it is now possible to split these, so that the lower earner has an agreed percentage of the pension either as an immediate cash sum or a share in the income at retirement. It is essential to get any pension arrangements valued accurately. What may look like a comparatively modest pension could be worth much more than you think if, as is the case in the public sector schemes, the retirement income is linked to salary and includes annual inflation-proofing.

One of the likely consequences of these High Court rulings is an increase in pre-nuptial agreements, which are already used by many wealthy couples, particularly where the wealth is largely generated by one partner.

Effectively a ‘pre-nup’ (‘pre-cip’ in the case of civil partnerships) is an agreement on marriage that sets out the division of the assets and income should the couple later divorce. Such agreements are not legally binding in England and Wales but increasingly they are being taken into account by the courts where there is a dispute.

But be warned – the very process of preparing a pre-nup can be distressing, as it implies a lack of trust between the couple and a lack of faith in the future of the marriage.

Wesleyan Medical Sickness provides specialist financial advice for dentists. Telephone: 0808 100 1884 or visit the website at: http://www.wesleyanmedicalsickness.co.uk/

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