As inheritances grow in importance how can they be protected on divorce?
A recent study has shown that people born in the 1980s are likely to receive 16% of their lifetime income via inheritance. This is up from 9% for those born in the 1960s.
This is largely because the older generation amassed more wealth and income is not particularly increasing from the previous generation but what does it mean in practice?
Commentators are suggesting it will be mean a bigger gap between the rich and the poor and that more people are dependent on inheritance prospects to fund their retirement (as opposed to building up their own wealth).
From a family law perspective, it seems likely that inherited assets/ inheritance prospects are going to become even more significant issue when determining the appropriate division of the assets.
How is an inheritance treated on divorce?
A common question from clients (and their parents) is what happens to inherited assets on divorce, but the answer is not straightforward.
Section 25 of the Matrimonial Causes Act 1973 sets out all of the factors which a court will take into account when deciding the outcome of a case. Section 25 (2) (f) refers specifically to the contributions of each of the parties and inherited assets can be considered to be one such contribution.
How far an inheritance will be taken into account in any given case is a grey area because of the discretionary nature of the law. A lot will depend upon the specific circumstances of the case and importantly whether or not the parties could meet their needs without recourse to the inherited assets.
A court would also look at the factual matrix including:
- The length of the marriage
- When the inheritance was received
- What happened when it was received in terms of where it was placed and what happened to it next eg was it invested, was it in joint names, if spent then what on etc
- Specifically, the court will be interested to know whether it was mingled with other family assets and/ or used to fund family expenses
In practice what the above means is that an inheritance received at the beginning of a long marriage and which was used to fund a family home would be very unlikely to be excluded from a settlement and most likely the whole of the inheritance would be taken into account when dividing the assets.
On the other hand, an inheritance received towards the end of a short marriage and which was put in a separate account in the receiving party’s sole name and not mingled might be wholly excluded and retained by the receiving party.
There are, of course, lots of scenarios in between these two examples and the court retains a discretion to include the entirety of an inheritance, exclude it in its entirety or make an adjustment which comes in somewhere between the two options.
Can you prevent an inheritance being taken into account on divorce?
Whilst it can be considered an emotive issue from a legal perspective, at least, thought should be given when considering the passing of wealth as to whether or not the person or people it is being passed to is/ are married or likely to marry and what the impact might be should any marriage flounder.
It might be appropriate for there to be some protection for the inheritance in the form of a prenuptial agreement or a postnuptial agreement. The same could make it clear that any inherited assets would be retained by the person who inherited it in the event of a divorce. Whilst these types of agreements are not 100% watertight, they are now extremely persuasive to a court.
What about an inheritance that has not yet been received?
The family court is generally reluctant to take into account a simple prospect of inheritance in the future on account it is considered too remote and the person from whom the receiving party might be due to inherit from could lose their money, fall out with the receiving party, change their will and so on.
However, if the prospect is reasonably imminent it is possible it could be taken into account. As with very many things in the family law arena it depends on the exact circumstances of the case.
If you have any questions about inherited assets, settlement on divorce generally or nuptial agreements then please do not hesitate to contact us today.