Inheritance & Divorce

Divorce and the financial negotiations that ensue are already difficult creatures for clients to have to face in the aftermath of a separation but add to that inherited assets or wealth and you have a more complicated situation.

Leaving aside the added emotion that comes from the feeling that money or property handed down from parents or family members is at risk of going to your ex-spouse, how those inherited assets are dealt with by the Court will also be up for discussion.

What is clear from case law is that inherited assets or wealth are “non-matrimonial” by their nature. That distinguishes them from “marital assets”, which are those accrued during the marriage by the effort of one or both parties jointly and commonly include the former marital home, savings, pensions, investments etc. etc.

There may be arguments of course that some assets though accrued within the marriage were built as a result of a special or stellar contribution from one party alone – that I leave for another day!

The importance of distinguishing inherited assets as “non-matrimonial” is that this class of assets is not subject to the normal “sharing principle” that marital assets are i.e. there is no entitlement by one spouse to an equal share of the other’s non-matrimonial assets.

Sounds great! Surely that means my inheritance is safe!

If all in family law were that clear cut the Court wouldn’t have the wide discretion that it does and litigants in person would be in a much better position.

The fact is that whilst the Court has been clear that inherited, non-matrimonial property is not subject to the normal “sharing principle” it will not be discounted entirely.

Firstly, we must look at whether there has been any “mingling” with marital assets i.e. part of an inheritance used to pay off the mortgage on the marital home or purchase the marital home outright. Any money mingled with a marital asset (which the marital home is, however it was purchased) has the effect of diluting the “non-matrimonial argument” and the payer may have to accept that those monies have been taken into the “pot” for sharing (in which case he/she may have to rely on arguing that their greater financial contribution should give them more of a % settlement).

If inherited monies have been kept separate and apart and identifiable i.e. in separate savings/investment accounts then the Court may also look at the timing of the inheritance and whether the family has been used to drawing any income from the assets, in the case of investments or shares.

Ultimately, the Court will come back to look at the needs of the parties. Even if you have been successful in establishing that assets are inherited and therefore non-matrimonial the Court will invade those assets if that is the only way in which the needs of the other party can be met.

This was very recently evidenced in the case of YvY, in which the husband had a landed estate worth about £26m. The marriage was 26 years long. The wife was awarded 32.5% of the assets which the Court felt fairly met her needs. The Court made comment about sharing and felt that, taking into account the origin of the wealth, the award that they had settled on met not only her needs but also was fair in terms of any entitlement to share.

In the end, the needs of the parties tends to trump all other arguments and this recent case shows that, even in big money cases, needs arguments can be key to settlement.

To give clients the best possible chance (absent any post-nup or pre-nup agreements) the advice must be to keep any inheritance separate and apart and try not to have recourse to it to fund family life – not sure how feasible that is within the context of a marriage! – and accept that, whatever steps are taken, if it is necessary to fairly satisfy the needs of the other spouse on divorce it will be used.

I do wish for my clients that I could say “yes, you’ll be able to keep all of that” or “no, that will have to be shared” and the proposal that marital finances on separation should be resolved by applying a formula sounds appealing to those who crave certainty.

..…the difficulty is, and probably always will be, how to legislate to provide certainty whilst ensuring a fair outcome for all, given the diversity of circumstances surrounding family structures and wealth and the vast differences that there can be in arguments about “needs”.

Ultimately, the Court retains its discretion as regards inherited wealth and assets and the way in which it takes such assets into account in any particular case so there can be no absolute certainty.