Grey divorce part two – passing family wealth across generations

In the first part of the series, “Grey Divorce – hidden battles for protection and succession of family assets”, we looked at the recent trend of an increasing divorce rate for older couples and, in particular, the case of CSH vs LS or LS formerly known as CYY (FCMC 12435/2016; [2020] HKFC 143) (the CSH case). As can be seen in the CSH case, where the husband collapsed shortly after he started to give evidence, Court proceedings can be a source of extreme stress for elderly litigants.

The case of Z v X (C: Intervener) (CACV 166, 251 and 252/2011; [2012] 5 HKLRD 791) also involved “silver splitters” who were around 50 years old when the wife petitioned for a divorce, after finding out that her husband had a second family. The family assets included complicated shareholdings in BVI and listed companies, Beijing properties and an MPF account. The Court had to determine the beneficial ownership of the shareholdings as well as value the shares, in order to ascertain the amount of matrimonial assets available for distribution. The matter was further complicated by the husband’s cohabitee being joined as Intervener in the proceedings and claiming beneficial ownership of shares in the BVI company. The Court of Appeal eventually ruled that the total assets of the husband and wife for distribution amounted to HK$402 million.

The husband and his cohabitee appealed to the Court of Final Appeal on the finding of the husband’s beneficial ownership of the BVI company shares. The appeal was dismissed by the Court of Final Appeal as it held that it would not be purposeful to embark upon a review of a finding of fact.

Although the divorce petition was filed in 2006, the matter was only disposed of in 2014 after a re-trial, cross-appeal to the Court of Appeal and finally an appeal to the Court of Final Appeal.

Instead of going through protracted litigation over family assets in divorce proceedings, the couple, and indeed the family as a whole, may well have benefited from carefully drafted post-nuptial/pre-nuptial agreements or a Deed of Family Arrangement, under which family assets could have been distributed in a way that best preserved family harmony.

Post-nuptial agreements

Under section 14 of the Matrimonial Property and Proceedings Ordinance (Cap. 192) (MPPO), maintenance agreements (or separation agreements) entered into after marriage between couples who have separated or intend to separate are recognised as valid contracts. Such agreements may contain financial terms (e.g. making of payments or disposition/use of property) and govern the respective rights and liabilities of the couple when living separately from each other.

While post-nuptial agreements that are not maintenance agreements are not generally recognised as legally binding, they can be taken into account by the court when deciding the outcome in divorce proceedings under section 7(1) of the MPPO.

Pre-nuptial agreements

In considering the succession of family wealth, it is common for high net-worth parents to be concerned about their child’s marriage and possible future divorce. Accordingly, engaged couples of wealthy families are often requested by their parents to enter into pre-nuptial agreements to protect family assets and interests.

In Hong Kong, pre-nuptial agreements are not binding on the Court, but the Court will give decisive weight to them if it is fair to do so. In SPH v SA [2014] 3 HKLRD 497,the Court of Final Appeal confirmed that the principles enunciated in Radmacher v Granatino by the UK Supreme Court, should also be regarded as the law in Hong Kong. Pursuant to Radmacher v Granatino, an agreement will carry full weight, only if each party entered into it of his or her own free will, without undue influence or pressure, having all the information material to his or her decision to enter into the agreement and intending that it should be effective to govern the financial consequences of the marriage coming to an end. It is also desirable for the parties to obtain sound independent legal advice which will likely give more weight to the agreement.

Deed of Family Arrangement

A Deed of Family Arrangement entered into between family members (including the adult children) can often address a family’s concerns about how family assets are to be distributed, even where the parents do not intend to separate.

In our experience, depending on the type of family assets, there are different considerations to take into account when making a family arrangement. Care should be taken in structuring the family arrangement, as the Deed itself may attract stamp duty, payable in circumstances where there is a swapping of assets (landed properties or shares of companies in Hong Kong) with or without any equality payment mechanism. There may also be further stamp duty implications when carrying out or giving effect to the terms of the family arrangement.

Landed Properties

It is common for elderly couples to have landed properties, either in their joint names or in the sole name of either the wife or the husband. While the matrimonial home will likely be kept during the couple’s lifetime, other investment properties can either be liquidated and distributed or transferred into the names of adult children. However, there is the issue of stamp duty on the transfer of landed properties in Hong Kong and the higher stamp duty rate for individuals already owning a landed property may complicate the matter. If the properties are held by private companies, the effect of stamp duty can be minimised, as there only needs to be a change in the shareholding of the property-holding company and not the registered ownership of the landed property itself. Restructuring the investment holding vehicles can be an effective way to transfer ownership of landed properties to the next generation. Further, there will be a need to enter into a shareholders’ agreement in circumstances where an asset holding company is set out to be held by adult children (which is separate from the Deed of Family Arrangement) to avoid any future disputes amongst adult children who were made the beneficiaries of the family assets.

Furthermore, in considering the holding of landed properties, there may be concerns if the children are to be joint owners, as there may be differences between the joint owners down the road on the sale or use of the property, which can be the cause of family discord.

Family Business

Where a family business is involved, it is advisable to consider which of the children are willing and capable of taking up the business as a going concern. To ease the transition from one generation to the other, the child(ren) who will be running the family business will need to be familiar with the operation of the business and company culture. The new management has to be appointed to the Board and introduced to the existing management team.

While not all children will be involved in the management of a family business, it is common for them to have some interest in it as shareholders. Again, a shareholders’ agreement governing their relationship and the way the Board makes decisions will provide a helpful framework so that everyone involved will know what to expect.

Stock/Shares and Cash

It is quite common for elderly parents to consider distributing cash (either from savings or sale proceeds of stock/ share portfolios) in excess of their needs to their adult children during their lifetime. This is especially the case where certain other distributions are made to the children and cash distributions are used to equalise any differences between those non-cash distributions. It is important to take into account the tax residence of the children in making distributions, as different jurisdictions may impose tax on the recipients on gifts they receive. Very often, an offshore family trust will be set up to address foreign tax implications.

Conclusion

Reaching an agreement, be it between the couple only or together with adult children, is never easy, but a win-win solution for both generations is well worth the effort. To ensure that everyone is on the same page, it is important to engage lawyers to prepare a written agreement setting out the agreed terms and for each party to have their own independent legal advisor to advise them of the legal implications and effect of the agreement.

With proper advice, what might have started off as a family crisis can turn into an opportunity to plan for family succession and preserve family harmony and relationships for years to come.