There may be rubles ahead

The increasing mobility of international families and its strain on relationships has made it necessary for private client lawyers to understand the complexities involved in dealing with international divorce.

There may be rubles aheadThe wealthy need to plan for a variety of challenges – tax, business and economic risk, succession and trade. Unfortunately, many of those involved in London’s growing wealth management industry have been slow to recognise that such clients also need to plan for potential marital difficulties in a jurisdiction where approximately one in two marriages end in divorce.

Advisors must recognise that an international move can often prove fatal to a marriage, particularly one which is already in difficulty. Relocating clients often devote a significant amount of time and resources towards protection of their wealth, through the setting up of trusts, investment vehicles and the like. However, in many jurisdictions including England, this wealth could be decimated by divorce, eradicating the benefits of careful planning.

While advisors should not expect to fill the role of relationship counsellors, matrimonial considerations need to be at the very heart of an effective wealth planning strategy. Devices such as international pre-nuptial agreements can no longer be ignored at a time when the awards being achieved in England generally cannot be bettered elsewhere.

Roman Abramovich, the richest man in Britain, is one of over 300,000 Russians who are based in London. While Abramovich’s divorce was cleverly handled, and jurisdiction was secured in Russia, it has unsettled many in London’s Russian community, particularly those who have not ensured that their Russian marital contracts are mirrored in the UK.

The increase in cases with a Russian dimension is explained partly because of the UK’s unique non-domicile tax rules that allow wealthy individuals to avoid paying tax on income earned overseas. Important also is the Yukos effect; in 2003, Russia’s then richest man, Mikhail Khodorkovsky, was jailed while Yukos, his oil company, was dismantled, prompting a diaspora of Russian oligarchs to London.

A move to England can be an exceptionally expensive mistake as our generous tax system is matched by an equally generous divorce system, making England the jurisdiction of choice for ‘forum shopping’ wives. A move needs to be considered carefully at the outset, weighing up the tax and other advantages against the matrimonial disadvantages.

If divorce proceedings between two Russian nationals are commenced in England and one party suggests that Russia is a more appropriate forum, the court may decide to stay the proceedings. To justify a stay, the applicant must satisfy the court that there are pre-existing proceedings in Russia and that justice can be done more conveniently and at considerably lower cost. Generally speaking, an applicant will be disadvantaged if proceedings are not well advanced in the Russian Federation. It is crucially important to get in first and issue an application in Russia without delay.

The jurisdictional sweep of the English Courts often comes as a major surprise to Russians who find themselves involved in divorce proceedings here. The financial consequences of divorce are very different in England and Russia. It is vital that consideration is given to choice of jurisdiction once cracks begin to appear in a marriage and divorce is contemplated.

The core differences between divorcing in Russia and England are as follows:

Prenuptial agreements

Prenuptial agreements are increasingly common in England, particularly for international couples. Such agreements are not binding per se but will have significant evidential value to influence the court provided each party has received independent legal advice, there has been full financial disclosure, no undue pressure has been brought to bear on either party and the agreement is, at least, arguably fair.

Marital contracts are binding in Russia irrespective of the length of marriage. The formalities for executing such an agreement are minimal; Russian law requires nothing more than the two spouses attending before a notary public to sign the agreement. Neither independent legal advice nor financial disclosure is required. A Russian marital agreement will almost certainly be ignored by the English Courts.

Maintenance

In England, the obligation to pay maintenance generally continues until the death or remarriage of the recipient. This is especially true in cases where a wife has acted as a ‘home maker’ and the husband has been the primary provider. The court also has the power to capitalise spousal maintenance.

Russia takes a more restrictive approach and, even in the case of the very wealthy, maintenance orders are unusual.

Trusts

In England, trust interests will often be treated as a resource of a spouse if they are likely to be made available on request.

The fate of Yukos has prompted many Russians to make use of offshore international financial centres. Whilst Russia does not have a concept of trust in its domestic law, its courts will treat offshore trusts as separate legal entities over which they do not have jurisdiction.

Marital property

Russian law allows inherited wealth or assets acquired before the marriage and gifts to spouses to be excluded from the pool of marital property to be shared on divorce. In England both assets acquired before the marriage and inherited wealth will be included in the pool of assets available for fair division between the parties. There will generally be an equal division of capital unless fairness requires a departure from equality.

Before deciding on a move to England, international couples need specialist advice on the advantages and disadvantages of the jurisdiction in relation to matrimonial law alongside other aspects of wealth management. Although contemplating marital breakdown seems unromantic, given the strains of international relocation and the differences in English and Russian divorce, it may well pay to think ahead.

James Stewart is chair of the international wealth protection group at Manches and Catherine Kalaschnikova is a Moscow divorce lawyer.