Prenuptial agreements: building a safety net around assets

A and M have been friends and dating each other for the past one year. They decided to tie the knot in December 2015. And being financially savvy, they also decided to sign a prenuptial agreement before marriage, to avoid any dispute over division of assets in the future, in case of a divorce.

While everyone hopes that the union of marriage be life lasting, the cold reality is that even in India, the level of divorce has increased. In the US, according to the Centers for Disease Control and Prevention, more than half the marriages end in divorce, according to 2012 statistics. According to one estimate, in India, while the divorce rate was just 1 in 1,000 a decade back, it is 13 per 1,000 now—still low, but growing at a steady pace. To protect oneself from undue harassment over ownership of assets, a prenuptial agreement must be in place. But in India, these are considered taboo, and are not openly discussed.

A prenuptial agreement is a contract between two individuals who are about to get married, detailing the assets, liabilities and financial resources held by each, and an equal division of assets, should a divorce occur.

The agreement should detail the division of property, financial assets, liabilities as well as division of personal possessions clearly, and should be notarised by independent lawyers for each party. Further, it should be fair and duly acknowledged by both parties.

In India, however, prenuptial agreements are neither legal nor valid, since marriage is not considered a contract in most faiths. It is a religious bond between husband and wife, and prenuptial agreements need the contract to be made valid under the Indian Contract Act, 1872. In some religions, however, marriage is considered a contract and, therefore, the laws applicable are different and need to be approached appropriately.

Many countries, including Canada, France, Italy, and Germany have matrimonial regimes. Also called marital property systems, these are systems of property ownership between spouses providing for the creation or absence of a marital estate, and if created, what properties are included in that estate, how and by whom that is managed, and how it will be divided and inherited at the end of the marriage. In the UK, as of 2007, prenuptial agreements are enforced (although there have been some exceptions).

I had called one of Mumbai’s top divorce lawyers to understand whether the richer section of India chooses to have prenuptial agreements. The lawyer mentioned that roughly 10% of marriages, mainly in the affluent socio-economic group, opt for these.

Till just about five years ago, such agreements were almost unheard of in India, but are now on a rise, mostly among the more affluent classes. One could attribute the change to a growing number of divorces in the country.

What makes these agreements unique for many Indians is that couples forgo their rights to traditional Hindu laws in order to make sure that their individual finances are safe. Recently, Minister for Women and Child Development, Maneka Gandhi, had spoken to D.V. Sadananda Gowda, the Minister for Law and Justice, on the need for prenuptial agreements to be made mandatory before every couple ties the knot. This is because there are many women from lower socio-economic backgrounds, who fight endless battles in court over marital ownership of property and assets post-divorce. Alimony somehow seems inadequate and is decided by the husband on a case to case basis, and may be insufficient to meet the cost of living needs of the woman post-divorce.

Prenuptial agreements can be a good starting point discussion between the to-be bride and groom, so that both are fully aware of the family assets, liabilities, business ownership and heirlooms, that each family owns, and how the ownership distribution would be in case of a divorce.

These agreements can protect one’s financial stability. For instance, in many family-run businesses in India, the manner of holding of shares and ownership are structured such that the business is closely held to avoid outside intervention. Most of the management decisions are taken by the head of the family-run business, without considering democratic decision making in the process.

Discussion about division of property in family run businesses and Hindu Undivided Families (HUFs) should be clarified by both the boy and the girl through open and transparent discussions.

I see little reluctance to discuss such agreements among the affluent family run business class clients.

To be open, transparent and clear on the mode of holding of assets in a family-run business also forms the basis of discussion among investors. Estate planning and future outlook of the business along with distribution of assets are among other issues discussed at the financial planning stage itself.

A prenuptial agreement also protects the children’s future, in case of separation. Most couples work towards the common benefit of their children’s needs such as education, marriage, and their day to day needs. However, some families would prevent transfer of assets to children so that the other spouse is not benefitted. A prenuptial agreement can prevent such anomalies and decisions.

Sometimes, all clauses may not be covered in a prenuptial agreement, since circumstances change and so do financial conditions. This could further create a rift between the couple in the future.

In conclusion, it is always better to tread on the path of financial ownership and obligations when the mind is calm. Make a prenuptial agreement earlier, rather than when the mind is in a state of turmoil and emotional suffering in the event of a divorce.

Marriages are made in heaven, but divorces are created on earth, and we cannot shut our minds to this reality.

Dilshad Billimoria is a certified financial planner, and director, Dilzer Consultants Pvt. Ltd.