So what constitutes a pre-marital asset (PMA)?
When you get down to it quite a lot actually. There are loads of examples and in an good break up most of the simple stuff could and should be easy to split up.
Ironically a big one might be the engagement ring, but also jewellery, watches etc. However, things might include a record collection, items of furniture, paintings, ornaments. These will all be personal items brought into the family home. Add to this individual gifts and inheritance. These are all excluded from the assets to be split.
The other big ones are property, pensions and savings. Let’s break these down one by one as this is where I get a bit grumpy regarding woolliness.
Looking at the family home.
Say you moved into your partner’s property and that became the family home. Research suggests that the law is clear, the family home should lose its pre-marital status and come under a 50/50 split. Forget what the law suggests. Is this fair? After all if, while you are married the house is sold to buy a new marital home the PMA is dissolved and the new property clearly falls into the 50/50 split. Let’s try to be fair and say yes, some PMA exists. How do we go about evaluating a split. But before we move on. What about if your partner kept this property but on marriage you bought a different one to call your matrimonial home, or they moved into your pre-existing property making it the family home?
The key question here is how we deal with assets fairly. And this comes down to the fact that as a married couple your “finances” are merged. The mortgage may come out of one pay packet but your finances are considered joint. So you are both “paying” for the asset. This includes in this example paying the mortgage on the family home and potentially the second home bought pre-marriage. Then there is the growth of the asset to think about. Surely the concept of coupledom means that the growth of your shared assets should be shared?
So here’s my thoughts.
The “value” of the PMA should be predicated on the actual value at the point of marriage.
If the property(s) had an outstanding mortgage then the PMA would be the value of the property minus the outstanding debt at the time of marriage, set against the value of the property(s) at separation. I would suggest that selling one property to pay off some or all debt on the second should dissolve all the PMA for both. Similarly, any remortgage on the pre-owned family home to realise assets should dissolve the PMA. In this way the law becomes binary and therefor simple and devoid of argument.
In this way PMA is easy to break down. Here is an example:
Partner A owns a property outright, valued at marriage as £100,000 and at separation as £300,000. The PMA would be £100,000 and asset to be shared would be £200,000.
Partner B owns a property with a mortgage, valued as £200,000 with £100,000 debt outstanding at that time. At separation the property is valued at £500,000. The PMA would be £100,000 and asset to be shared would be £400,000.
I would suggest that remortgaging either property to realise assets would result in rendering both PMA void.
Note: this legal framework would significantly impact one group of people; those that run property management as an individual rather than as a limited company. I would whole heartedly suggest that those entering into marriage who have a property portfolio take some time to think about prenup agreements.
Looking at pensions.
This is where things get more messy. Pensions can make up a massive part of the asset pot at separation. The current straight line PMA calculation that lawyers use is just plain wrong. I’ll explain along the way.
Depending upon career path and life events most people will have some private pension wealth along with state pension entitlement.
A quick chat first about state pension provision. If you have been employed for most of your life then your National Insurance contributions will have placed you in a position where you are up to date and will get the maximum amount. If not, then you should really look to see if you can claim under any one of the provisions set out, stay at home parent, carer or entitled to unclaimed benefits that provision NI. Don’t delay. Many claim opportunities are time bound.
For private persons, whether company or self invested the valuation, if you started contributions before marriage, then the valuation a lawyer will asses as being fair at the date of marriage will be wrong. The straight line formula used is actually never accurate as the only time it becomes correct is if the asset is deemed 50/50, i.e. started on after the date of marriage. Any other calculation wrong, and not in a “close enough for jazz” sense.
To explain. Pension saving is based on a tax efficient investment vehicle, where the provider attempts to make your money grow while making some for themselves; even company pensions employ pensions specialists so often the same company that you may separately use to top up privately. You normally pay in a percentage of your salary monthly, often matched or topped up by your employer to build up a pension pot. Now the critical thing to note here when valuing a pension at marriage is that it is not only a %age investment growth, but also a %age increase whenever you get a pay rise or promotion. So the amortised growth is actually much more acute than it would be, meaning a straight line valuation assumes 0% pay rise and 0% asset growth for the entire term of the savings.
This benefits the owner of the PMA and depending the dates of pension start, marriage and separation quite significantly. click on this link to go to the calculator.
Looking at savings
Working on the principle that the PMA is the actual value of the saving then there are a few complexities to work out here, because there are a lot of complicated savings vehicles.
Endowment policies – now its highly unlikely anyone has one of these discredited policies now, but these are almost impossible to value as most have ridiculously low cash values, as they only “promise” to pay out anything close to their real value upon the term date. As such because of their rarity, I would suggest that the best valuation would be to request an auction valuation for marriage and separation date. The surrender value will most likely be derisory and meaningless. It is possible to do a higher assumed value PMA which may be of benefit if the term date is soon after separation.
ISAs and Bonds – these are long’ish term savings, often with penalties for early withdrawal. If one partner has something like this purchased in cash before marriage then you should be able to get a valuation at separation, and possibly a valuation at marriage. With the valuation at separation and knowing the penalty clause and terms, you can work out both the PMA and a higher assumed PMA.
Premium Bonds. This is simple, any winnings are shared. If the bond was bought before marriage then its full value is a PMA.
Stocks and shares. This is another complicated mess. The value of investment portfolios will vary day by day. The key takeaway for this is that any dividends realised will have been shared during marriage ether in cash, or re-invested. The critical thing to note is that the total portfolio is not the thing to share as such, it will be when the shares were bought.
So to keep things simple.
Partner A had 1,000 shares in ABC Ltd pre-marriage. If after marriage they invested dividends or cash into more shares, say another 500, then the PMA is 1,000 shares, the shared asset is the further 500 shares.
To determine the PMA value of the pre-exising 1000 shares you can get a market valuation at marriage and seperation. if there is an increase then the difference can potentially be seen as to be shared. If the value has dropped then a 50/50 split or some proportion may be considered. This would be a court decision based on proposals from lawyers.
Liabilities and Debt
All debt at the date of separation will be seen as shared. This includes loans, mortgages, credit card debt and overdrafts and legal obligations to pay. There are a few exceptions to this but demand legal challenge.
There is a burden of proof needed for both the following:
Pre-Martial debt.
This can prove problematic to prove. Unless you have paper evidence of ownership of debt on entering marriage there is difficulty presenting this to court.
Individual/Non-Matrimonial debt.
While courts have concept of this, again proof is needed. This again is problematic as often this is built because of irrational behaviours like gambling, drug or alcohol dependency or spending addiction. Quite often its money out of joint cards or accounts and getting evidence can be an issue.
I can only recommend that if you are separating and debt is a major factor that you seek legal advice prior to defining a separation date, asking what evidence needs gathered.
I’ll have a calculator showing the “devastation of debt” shortly
Summary
Firstly I would love it if part of the process of becoming legally marrieds involved a full asset disclosure to be lodged somewhere. This would make the job of separation so much easier.
Until that time I would heartily recommend that any aspiring couples do this for themselves, even if it something to laugh about when they celebrate their golden wedding anniversary.
Secondly I beg lawyers to have a look at my basic calculators regarding PMA for pensions and property and take note of the ideas regarding when PMA dissolves and becomes a simple 50./50 split.
Thirdly, for those about to embark on the joy of marriage I wish you every happiness. Truly. There is nothing more joyous than two people finding each other and wishing to spend their life together.
Fourthly, if you are not happy, if things are wrong and can’t be fixed, GET OUT. Even if you have, or actually especially if you have children. The most messed up people I know are the ones who’s parents stayed together for them. As long as you prioritise your children at every turn you and they can only be happier when you are out of whatever is making you miserable.
Lastly. Lawyers. look at the numbers. See how much your client might be losing out on, or unfairly gaining and ask yourselves is your role still combative, to “get the best for your client” or is it to represent what’s fair and to set expectations for a universally agreed starting point to allow couples to find the right number for settling based on an accurate valuation?