CROSS BORDER PRENUPTIAL AGREEMENTS

Navigating the Dangerous Shoals of Love, Wealth and Marriage Involving Multiple Countries of Origin, Domicile and Residence

By Mark E. Haranzo and Brooke M. Elliott

A prenuptial agreement is entered into by a couple before marriage to address the rights and obligations that accrue in the event of a termination of the marriage by divorce or death. In the United States, there is not a uniform approach that controls prenuptial agreements because matrimonial law varies by state. Therefore, couples may face challenges enforcing a prenuptial agreement in different states due to conflicts of laws from each state. These challenges become more complex when navigating cross-border prenuptial agreements due to the application of foreign laws and multijurisdictional issues.

As the world becomes more interconnected, international issues associated with prenuptial agreements are of significant importance because clients' wealth and relationships will increasingly span across many different countries and jurisdictions. There are many reasons why a couple may need to consider an international prenuptial agreement, such as owning assets in different countries, having multiple residences and/or nationalities, or the location of their business activities. It has become commonplace for couples from different countries to marry, to own assets in foreign jurisdictions and to live outside of their countries of origin.

Since matrimonial laws are governed locally, each country has its own procedures and legal concepts to address a couple's property, marital and inheritance rights. Therefore, the criteria for enforcement varies among jurisdictions. In addition, while some countries have well-developed laws governing prenuptial agreements, others are much less developed, and it is common for the courts' position in various jurisdictions to diverge on the treatment and enforceability of prenuptial agreements.

Civil law jurisdictions tend to have more established marital law regimes, whereas the laws governing prenuptial agreements in common law jurisdictions tend to be more unsettled. For example, the law governing prenuptial agreements in the United Kingdom, which is a common law jurisdiction, remains unsettled and largely relies on the 2010 landmark decision of the U.K. Supreme Court in the case of Radmacher v. Granatino, which held that while a prenuptial agreement is not automatically binding, the courts will consider the agreement if it is "freely entered into" and both parties have "a full appreciation of its implications." On the other hand, civil law jurisdictions, such as Brazil, tend to have more established marital law regimes.

China's legal system is modeled after civil law jurisdictions. Similar to other civil law jurisdictions, prenuptial agreements are widely recognized in China so long as a court determines that the agreement was mutually entered into between a couple. Under the newly effective Chinese Civil Code, the term "joint property" generally refers to the property acquired and owned by husband and wife during a marriage, whereas, property acquired prior to marriage is generally considered "personal property." In the absence of a prenuptial agreement or in a situation where a prenuptial agreement is deemed to be vague, the distinction between joint and personal property should be governed by the relevant provisions of the Chinese Civil Code. However, the Chinese Civil Code allows for a couple to enter into a prenuptial agreement and elect to treat marital property as owned separately, jointly or as a combination of both.

Although Hong Kong is part of China, the arrangement between China and Hong Kong has been described as "one country, two systems" because the two have historically had a separate legal and judicial system. Hong Kong was a British colony for more than 150 years and has adopted a legal system with principles similar to English common law. Therefore, the laws governing the enforceability of a prenuptial agreement are unsettled in Hong Kong and very few cases involving prenuptial agreements have been adjudicated by a Hong Kong

court. While Hong Kong is technically not bound by English common law, the courts largely rely on the Radmacher v. Granatino decision, and therefore, a court in Hong Kong will consider whether a prenuptial agreement is enforceable. Notwithstanding, the court has ultimate discretion to determine whether the agreement is fair and should be upheld. In the recent landmark Hong Kong case of LCYP v. JEK [2019] HKCFI 1588, the law was clarified by providing guidance about the standard at which the financially weaker party's needs must be assessed in the context of an "unvitiated" prenuptial agreement. In general, an "unvitiated" prenuptial agreement describes a clear agreement, entered into freely by both parties without evidence of factors such as duress or undue influence being present. Essentially, in the context of an "unvitiated" prenuptial agreement, the court held the agreement must be "fair."

CHOICE OF JURISDICTION IS KEY

One of the key determinations when drafting a prenuptial agreement is the choice of jurisdiction that will govern the agreement. A prenuptial agreement should be drafted to comply with the laws of the couple's primary jurisdiction, which is a subjective determination based upon where the couple has the most connections. Factors that may have a significant bearing on the enforceability of the prenuptial agreement include the couple's current or future residence, domicile, their business connections and the location of their assets. If a couple plans to live in the U.S., a prenuptial agreement is commonly drafted under the law of the state where the couple will establish residency. On the other hand, if the couple plans to live abroad, it may make sense for foreign counsel to draft the prenuptial agreement, and for U.S. counsel to review the agreement to ensure any relevant U.S. state law provisions are incorporated.

At the outset of negotiating a prenuptial agreement with international components, it is always important for both parties to engage separate foreign counsel to ensure that the agreement is drafted to comport with the laws of all relevant jurisdictions. This helps to assure that any differences in the application of foreign laws –such as the treatment of separate, marital and community property or the treatment of trusts and inherited assets – is properly addressed. In order to protect the rights of both parties and to increase the likelihood for the prenuptial agreement to be enforceable in the future, separate foreign counsel should be consulted in any jurisdiction where a party resides, conducts business, holds citizenship or in which a party or party's family owns significant assets. Consideration should also be given to having the agreement drafted in different languages to ensure that it is in each party's native tongue. The ultimate goal is to execute an agreement that is enforceable in any jurisdiction where the couple may reside or own property at the time of death or divorce.

ADDITIONAL CONSIDERATIONS

In the U.S., courts have discretion to recognize foreign prenuptial agreements and will generally do so unless the agreement is found to be unconscionable or one that otherwise frustrates public policy. From a crossborder perspective, some courts will be more likely to enforce a prenuptial agreement if it is drafted in the native language of both parties. Therefore, a prenuptial agreement drafted in the U.S. for a couple with connections to China should be translated in Mandarin by local counsel. On the other hand, if the couple plans to live in China, the prenuptial agreement will generally be drafted by Chinese counsel, but should be reviewed and translated by counsel in the home country of the other spouse.

With that being said, a "globally enforceable" prenuptial agreement does not exist and, therefore, in the event of future litigation, there is no guarantee a court will find the agreement to be enforceable. Consequently, a belt-and-suspenders approach tends to achieve the most asset protection for clients. From a U.S. planning perspective, other asset protection techniques that are commonly considered in addition to a prenuptial agreement include premarital asset protection trusts or foreign grantor trust planning.

Please note: A recording of Mark Haranzo's webinar presentation of the same title, which kicked off Holland & Knight's International Private Client Webinar Series, is available on Holland & Knight's website. Another presentation, "Divorce in a Post-Tax Reform World with a Focus on Cross-Border Issues," is also available on Holland & Knight's website.