01 October 2013

Why splitting assets down the middle may not be fair in some divorce cases

Jocelyn Tsao
Partner | Hong Kong

When people decide to end their marriage, one of the first questions often asked during their initial meeting with lawyers is what percentage of the family assets will they be able to retain.

The assumption nowadays in Hong Kong is that it will be a 50/50 split and this is certainly where the court will start.

This is to ensure there is no gender discrimination – to acknowledge that the efforts of the homemaker are as valuable as those of the breadwinner, in line with the Hong Kong Bill of Rights and the Basic Law. This principle, set by the Court of Final Appeal in Hong Kong in 2010, has turned the city into the divorce capital of Asia in so-called “big money” cases.

How a “fair” amount is determined depends on circumstances which are specific to each case and, crucially, on the level of family wealth.

Family law in Hong Kong has retained its flexibility to allow for fairness in each case: 50 per cent is not always “fair”.

The award in a short marriage involving children and substantial family assets will be less than for that of a long marriage, and is unlikely to be as high as 50 per cent.

Typically, if the family’s capital resources are limited, the financially weaker spouse is awarded a large proportion of the assets, even when the marriage is short.

The court applies important “section 7” factors when trying to assess a fair result. A key factor is the financial needs of the two parties and the children. Other factors include the age of the parties, their earning capacity and the standard of living; whether they suffer from any disability will also be relevant. Conduct is only very rarely a relevant factor.

In a “big money” case, the court will first identify the incomes and assets to determine how much is in the pot. In Hong Kong, all worldwide assets owned by both parties will be taken into account for the purposes of asset division.

Assets acquired before and after the marriage will be considered, including assets that have been inherited. Often there is considerable debate in the courts about whether pre-marital assets should be ignored completely. Assets in which either of the parties has a beneficial interest are also taken into account, including trusts and shares in family and public companies.

It is a misconception that in Hong Kong assets held in a discretionary trust are always ring-fenced and not treated as matrimonial assets. Trust assets may well be kept out of the pot for division in circumstances where the trust is genuinely “dynastic” – that is, designed to pass wealth over generations without incurring transfer taxes.

Trust vehicles, “dynastic” trusts in particular, remain useful tools for asset preservation planning in tandem with the use of pre and post-nuptial agreements.

However, a recent “big money” divorce case before the Hong Kong Court of Appeal is a clear example of the court treating funds in a discretionary trust, owned by a professional bank trustee, as a relevant financial resource of divorcing spouses who are beneficiaries of that trust.

Once the asset pool is determined, the court will then apply the relevant “section 7” factors – in particular, needs. If the family has led a jet-setting life, owning private aircraft, luxury yachts and extensive wine collections, the level of the needs can be determined at a very high level, resulting in an assessment of a substantial capital sum by way of a clean break.

Where there are surplus assets, and that “clean break” assessed sum based on needs is below 50 per cent of total assets, the court will usually apply the “sharing principle” and will consider whether there are good reasons for departing from an equal division of the assets.

The court will look at a number of factors including the source of the assets (for example whether it was pre- or post-marital acquired property), and whether there was any special contribution or sacrifice by either of the parties in the accumulation of wealth.

This may result in the financially weaker party ending up with less than 50 per cent.

Alternatively, the court may determine that a departure from an equal division is not justified, and award a capital top-up increasing the “clean break” assessed sum, based on needs, up to 50 per cent.

This is a complex subject but ultimately the court will start at a 50 per cent division of all assets and then make appropriate adjustments. Legal advice should be taken on what would be a likely outcome based on the facts of a particular case.

The article was originally published in South China Morning Post on 1 October 2013.

Jocelyn Tsao Partner | Hong Kong

Category: Article