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Protecting your assets during a divorce (so you don’t find yourself in Sylvester Stallone’s Position)

Hollywood legend Sylvester Stallone and his wife Jennifer Flavin have hit the headlines after she filed for divorce. Within the divorce petition, Ms Flavin has claimed Sylvester Stallone ‘’has engaged in the intentional dissipation, depletion and/or waste of marital assets which has had an adverse economic impact on the marital estate.

“Moreover, the Husband should be enjoined from, selling, transferring, assigning, encumbering, or dissipating any assets during the pendency of proceedings.”

Along with this, both parties have claimed “exclusive use” of their waterfront property, the Palm Beach Mansion, which Stallone bought for $35 million in December 2020.

What is shaping up to be an acrimonious divorce has been potentially made worse with a lack of pre-emptive planning around asset protection by both parties explains James Turner, Director at asset protection and trust specialist, Turner Little.

There are several ways in which individuals, whether in the UK or Overseas, can approach this:

Prenuptial Agreements

While prenuptial agreements are commonplace for the wealthy in the United States as a way of stipulating asset division in the event of divorce and are covered under the Married Women’s Property Act of 1848 in the USA, they are less common in the UK. There is also the issue that in the UK, they aren’t automatically legally binding which can mean they are open to challenge if they don’t meet the qualifying criteria set by the Supreme Court. What isn’t clear is whether there is a prenuptial agreement in the case of Sylvester Stallone and Jennifer Flavin but after 25 years of marriage, there is a strong possibility that it wouldn’t cover assets that the couple have acquired during this period.

As of 2021, 42% of all UK marriages will end up in divorce, yet generally, it isn’t until a couple know they are heading for divorce or one of the couples has filed a divorce petition that individuals start investigating how to protect their assets. However, by this time, it is generally too late. Instead, investment in planning pre marriage or during the marriage with any additional assets can save a lot of time, money and conflict later.

Discretionary Trust

Setting up a Trust to preserve wealth for future generations by limiting inheritance tax can also be an effective mechanism in protecting assets when it comes to divorce.

The Trustees (who can be family members, independent professionals, business colleagues, friends or a mixture) act out the giver’s wishes and are the owners of the assets held in a Trust. In most cases, the Trust will be discretionary and whilst technically, the Trustees decide which of the beneficiaries receives what, when, and on what terms, they have an over-riding responsibility as Trustees to always act in the best interest of the Beneficiaries and the identity of the Beneficiaries and what they receive and when will normally be clearly specified in any Trust Deed. To set up this type of Trust, there is at least one beneficiary who must be living at the time the Trust is created; others can be added later. Beneficiaries do not have an automatic right to any income or capital from the Trust and the Trustees do have some discretion to determine how and when the beneficiaries will receive a benefit, depending upon how tightly a Trust Deed is written but, it is re-iterated and should always be borne in mind, that Trustees have an overriding responsibility to act always in the best interest of the beneficiaries.

Family Trusts

One of the big bones of contention in the Stallone vs. Flavin divorce is who gets the exclusive use of the material home. There is a practical solution for couples if, at the time of purchase, it is bought through a limited company, which is controlled by a family Trust.

This structure provides protection for both parties in that the family Trust retains ownership rather than an individual. It also means an agreement can be drawn up and reached at the time of purchase that clearly outlines the usage at all stages of the marriage and afterwards.

Family investment Company

A Family Investment Company (FIC) is a private company which can be used as a tax efficient alternative to family trusts but are different in that they are controlled by directors vs. trustees and the value of the entity belongs to the shareholders. It is also possible for the family investment company to be incorporated offshore, with UK directors.

FICs are particularly useful when protecting a junior family member asset shareholding in the company from divorce. They can be structured so that shares can only be held by direct family members (excluding spouses) and are generally beyond the reach of family courts. The value of shares held by a divorcing shareholder will be considered on divorce but given the restricted rights their value may be low or negligible.

If it is the founders who are divorcing, shareholder agreements can cover such items as restricting the onward transfer of shares, with the benefit of shares not being part of a divorce settlement, or subject to a financial claim against a shareholder’s estate in the future.

Turner Little have decades if expertise in asset protection, trusts and company formations. Their experience helps to get things right the first time. For more information, contact a member of our trusted team today.

We wish both Sylvester and Jennifer all the best in their divorce.

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.