How to Avoid the Loss of Wealth due to Marriage Breakdown

In judicial practice, changes in marital relations are an important factor in the division of property. Therefore, entrepreneurs in Western countries often try to maintain their property via a variety of arrangement, including signing prenuptial agreements, setting up trusts and drafting estate distribution plans. Among them, prenuptial agreements and trusts are important measures.

Take famous actor Tom Cruise as an example. By signing a prenuptial agreement to define all kinds of property ownership, when he got divorced with actress Nicole Kidman, Cruise, with a net worth of more than US$300 million, only paid Kidman US$4.3 million in addition to two apartments valued at US$10.5 million under the prenuptial agreement. He also signed a prenuptial agreement with his second wife Katie Holmes and they got divorced recently. Cruise set up trusts for Holmes and their daughter Suri for US$15 million. When Cruise was unable to keep his relationship with Holmes, they didn't get involved in asset disputes as expected by the public. According to the prenuptial agreement, Cruise paid US$25 million to Holmes as compensation. Signing prenuptial agreements and setting up trusts to arrange the marriage and property not only protect Cruise's personal assets from being given out in a large amount, but also protect the interests of his ex-wife Katie and their daughter Suri.

Coincidentally, in a recent divorce case, media guru Rupert Murdoch also used a similar tool to protect his assets. Murdoch used a separate family trust to own his shares in the family business and defined the beneficiaries, their interests and rights. Through the risk-shielding trust and several marriage contracts, he is able to maintain control over the equity ownership of the family business and related assets. Based on Murdoch's measures, industry insiders expected that after the divorce, Wendi Deng is only entitled to the rights under the trusts set up for their daughters. She will be only entitled to the rights to share the benefits instead of being authorized to participate in the management of the trust. It means that she could only receive dividends for the stakes she owns but couldn't control the property assets. That's why the shares of News Corp didn't drop as expected after the news of the divorce popped out. On the contrary, they closed the day up 2.22%.

The reason why the trust assets could escape from being distributed to the spouse after the divorce is mainly due to the independence of the assets: once the rich guys set up the trusts, the legal ownership of the assets under the trust will be totally transferred to the trustee: the trust company. In a word, these assets are no longer under the name of the rich people; therefore they don't belong to the assets that should be separated in the divorce. As for the trust company, it's only the owner of the assets in a legal sense but the benefits of the assets should go to the beneficiaries. So setting up a trust is the best solution to protect assets and avoid claims from the creditors.

Longfor Properties president and China's richest woman Wu Yajun used the trust to effectively prevent her divorce with Cai Kui from impacting the listed company. It is said that the couple set up Wu Family trust and Cai Family trust separately in 2008 before Longfor got listed. They put their ownership in Longfor into the two family trusts, respectively. The beneficiaries of the Wu Family trust are Wu Yajun and her family members while the beneficiaries of the Cai Family trust are Cai Kui and his family members. When setting up the offshore trusts, the main purpose might not be to protect against the breakdown of the marriage but for other considerations, such as saving tax. However, the establishment of the trusts has yielded undisputable results: the couple has already used the most reasonable way to divide their wealth before the company got listed. The divorce has negatively impacted the stock price shortly after the news emerged, but after market participants understood the trust structure, their confidence soon recovered and Longfor's stock price quickly rebounded and stabilized. Family trusts played an important role in avoiding disputes over stake ownership and debt defaults in the division of property.

Therefore, setting up private trusts is a key option to deal with the impact of the change of marital relationship on property.

The above-mentioned family trusts are usually in the form of offshore trusts. The so-called offshore trusts are also known as overseas trusts. They are set up in some offshore jurisdictions. As these offshore jurisdictions usually have a relatively loose or special policy toward the concept of trust and related legal infrastructure, the benefits of beneficiaries in offshore trusts can be more and better protected, compared with onshore trusts, via property planning and arrangement with less taxation burden. A growing number of wealthy Chinese have begun to choose a variety of offshore jurisdictions to seek the best solutions in terms of children's education, property succession and marriage purposes.