According to a number of articles published in the Financial Times, the uncertain outcome due to divorce laws in the United Kingdom and laws favourable to the partner of a couple less wealthy than the other have pushed many couples and armies of lawyers drafting prenuptial and postnuptial agreements to try to resolve matters in case of a messy divorce1.
In the United Kingdom, prenuptial contracts are not binding under English Law. In the U.S., prenuptial agreements are binding only under specific conditions, which requires very careful and very difficult (and expensive) drafting, and postnuptial agreements have a somewhat unclear status. Where there are children involved, the spouse who wants to safeguard his/her wealth or the business he(she) has founded, is obliged to recur to the services of Trustees, complicated structures, and having third parties unrelated to the family managing a business and assets that they have neither acquired, nor have a specific knowledge of. Frustration keeps growing among the heirs whose assets are managed by accountants and lawyers who often have more interest in complying with statutory burdensome measures imposed by tax and anti-laundering legislation than by the real needs of the family and the business they are supposed to protect.
Why not solve all these problems with one contract no longer than ten pages?
Swiss law provides for a simple solution which will be regularly upheld by the Swiss courts, and that is a combined marriage and (testamentary) renunciation pact. The Swiss system is unique in civil law countries, because it provides for a lift of the reserved quotas of spouses and other heirs, which cannot be undercut in other countries such as France.
1. INTERESTING RULES CONCERNING MATRIMONIAL PROPERTY LAW
The spouses can make an ante-nuptial or a post-nuptial marriage covenant whereby they choose not to apply the ordinary statutory system of participation in acquisitions. The latter is based on the equality of rights and obligations of both spouses: each spouse owns and manages his or her own property which they held before the marriage. The assets acquired in common or by each of the spouses during the marriage are divided at the end of the marriage (by death or divorce) in such a way that each of the spouses is entitled to one half of the other spouse's acquisitions (business, pension plans, home, bank accounts, etc.)2..
There is a system of community of property which can be adopted by a covenant but which would not fit the purpose of this article.
The third system, called of "separate estates", can be adopted also by a covenant and provides that each spouse retains his/her property of all assets acquired before and during the marriage.3. Should the marriage end by divorce or death, there are no assets to be divided, since there has never been any common property between the spouses.
The system of separate estates does not mean that the spouses may not hold any assets in common. The law provides that where there is no evidence to the contrary, an asset is deemed to belong to both spouses jointly (like in a joint venture). Thus, for important matters, the spouses should keep records to prove their sole ownership of assets – and this will certainly constitute one important factor to avoid a "messy" divorce: where financial matters are clear from the beginning, there is one less – and important – reason to go to court.
1.1 FORMAL REQUIREMENTS
The marriage covenant can be executed before or after the ceremony (ante-nuptial or post-nuptial marriage covenant). They spouses must be adult and have full discretion. The covenant must be duly drafted, preferably with the assistance of legal counsel, and authenticated by a public notary.4
The spouses may rescind or modify their matrimonial property system at any time they freely decide to do so, as long as they fulfill the formal requirements already mentioned. Of course, since it is a covenant, the agreement of both spouses is needed for any changes.
2. Interesting Rules Concerning Inheritance Law
Where, in common law countries, the owner of important assets must create foundations or trusts if he/she wishes to avoid them being cut up in order to be divided among the heirs, Swiss law offers the possibility to resolve the matter with testamentary pacts.
In Switzerland, a testator can conclude a pact with one, several or all his direct heirs, by which the heir(s) voluntarily renounce(s) or sell(s) his/her/ their right of inheritance5. This is called a renunciation pact.
Affluent spouses often conclude pacts where they reciprocally renounce to each other's inheritance. Parents and children conclude such pacts where the latter sell off their right of inheritance in order to benefit from advance cash or financing of their business, career, or other interests. In order to create clear cut situations between the second spouse and children of a former marriage, the renunciation pact makes it possible, e.g., for the husband to make a legacy to his second wife in exchange of which she renounces her rights of inheritance, and so avoids lengthy and complicated succession liquidations.
The pact of renunciation offers a practical solution to persons who want to deal with inheritance matters in time, before they decease, and regain freedom to manage their assets and business as they deem fit.
1.3 CONDITIONS PRECEDENT
Where natural persons are of a different nationality or reside in a different country than the country of origin of the law they wish to be applied to their succession, they must comply with the rules resolving conflicts of law in international matters in order for their choice to be valid.
In matters of succession, the conflict of laws deals with the choice of law which will rule both the procedural matters and the material law applicable to the estate. As a general rule, the conflict of laws has adopted the following standards:
- Real property is always subject to the lex rei sitae regardless of the deceased's personal law, i.e. lex domicilii, lex patriae or habitual residence.
- All other property is considered personal property, whether consisting of tangible or intangible assets, and is subject to the deceased's personal law, i.e. lex domicilii, lex patriae or habitual residence.
Generally speaking, the succession will be subject to the law of the state of residence of the deceased, unless he or she has decided otherwise in a valid will or other testamentary instrument.6.
In order to have Swiss law applied to the inheritance, and thus, the pact of renunciation, several alternative conditions precedent are possible.
Domicile or residence at the time of death is the essential criteria to determine applicable inheritance law. Foreign nationals are, in principle, subject to Swiss inheritance law if they are domiciled or residents in Switzerland.
Then, a Swiss national who, residing outside Switzerland, has chosen his lex patriae for his succession, will have Swiss law applied to it, except for real property lying outside Switzerland, where the local law will apply, including rules of conflict of that country, which may or not refer to the deceased's lex patriae.
As a consequence, a foreigner who has acquired the Swiss nationality has the choice for Swiss law to apply to his succession, including renunciation pacts, even he or she is no longer domiciled in Switzerland at the moment they decease.
1.4 FORMAL REQUIREMENTS
The renunciation pact can be executed anytime, as long as the parties to it are adult and have full discretion. The covenant must be duly drafted, preferably with the assistance of legal counsel, and authenticated by a public notary.7
The parties may rescind or modify the renunciation pact, if both agree, and as long as they fulfill the formal requirements already mentioned. However, difficulties may arise where the renunciation provided for payments or donations in exchange for the renunciation of the beneficiary heir/spouse, and where this person cannot return these assets to the original owner. Therefore, once it is executed, it is generally very difficult to rescind a renunciation pact.
WYLER S., WYLER B., The Swiss Civil Code, English Version,
REMAK Verlag Zürich, 1987
The Swiss Law of Conflicts (Loi fédérale sur le droit international privé – RS 291)
The Hague Convention of 1 August on the Law Applicable to Succession to the Estates of Deceased Persons
The Financial Times
1. OBSERVER – US : Tales of senior management – FT Mar 3, 2003; FT REPORT – FT PROPERTY:Breaking up can be so hard to sell – FT Oct 19, 2002; COMMENT & ANALYSIS: Divorce and the one-man brand: Jack Welch may find it hart to keep his marital difficulties separate from his position as a business icon – FT Mar 14, 2002; Divorce: why she no longer wants to split the bill – FT Feb 13, 2004; Breaking up is hard to do.. –FT Nov 30, 2004; A lesson from the "family bible" of success – FT Jan 17, 2006; LEADER: Till divorce do us part – FT May 27, 2006; NATIONA NEWS: Wealthy husbands avoiding English courts – FT Dec 4, 2004; Prenuptial agreements: Marry in haste, repent in pleasure? – FT Mar 23, 2007; "Postnup" boom among hedge fund managers – FT May 30, 2007; "Postnup" deals explore uncertain legal waters – FT May 31, 2007; FRONT PAGE – FIRST SECTION: "Postnup" boom as hedge funds seek to trim exposure to spouses –FT May 31, 2007; Review of divorce law urged after top payout – FT May 24, 2007
2. Art. 181, 196 – 220 Swiss civil code
3. Art. 185, 247 -251 Swiss civil code
4. Art. 184 Swiss civil code
5. Art. 495 par. 1 Swiss civil code
6. The Hague Convention of 1 August 1989 on the Law Applicable to Succession to the Estates of Deceased Persons provides e.g. that the law of habitual residence applies if that was also the deceased's nationality. If the deceased had been resident in a state for at least five years and no other state has a better claim, the law of residence applies. In all other cases, the personal law with the best claim applies (Art. 3 of the Hague Convention)
7. Art. 184 Swiss civil code
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.