On divorce, the court will (i) identify the available assets, (ii) compute how much they are worth and then (iii) look at how to fairly distribute the assets between the parties as they exit the marriage. This distribution stage is carried out primarily by reference to three principles – the most relevant principles to this article are sharing and needs[1]. In a needs case the parties needs outweigh the assets available and the court’s process is to divide the assets so as to be as fair to the parties as possible and meet as many of their needs as possible, with the needs of any minor children taking priority. In the event that the available assets exceed their needs then the court would look to share the assets between the parties equally. There are various reasons why a court may depart from equal sharing and the fact that assets have been inherited is one such reason. The court categorises assets as matrimonial or non-matrimonial and inherited wealth would usually be considered non-matrimonial, as it has come from an external source.
Inheritance received prior to marriage
If one party has inherited wealth prior to the marriage then it is advisable at the point of marriage to undertake proactive asset protection and to sign a pre-nuptial agreement [“PNA“] setting out the parties intentions on how the inherited wealth is to be treated. For example, the couple may agree that it will be considered the separate property of the person receiving the inheritance and not to be mingled into the general family finances. However, as the saying goes, “needs conquer all” – if the money is required to meet essential needs then its provenance may be a factor that is taken into account but ultimately the assets may still need to be invaded to provide for needs such as housing.
Inheritance received during a marriage
If an inheritance is received during the marriage then a careful examination of how the parties have dealt with the funds during the marriage would have to be undertaken. If the inherited wealth has effectively been merged into the family’s finances then it may well be considered to have become a marital asset capable of division – the concept of matrimonialisation. However, if the inheritance remained in a separate account in the sole name of the inheriting party then it may well be considered a non-matrimonial asset and so ring-fenced from application of the sharing principle (but remaining as a resource to meet needs).
Inheritance received after the parties have separated but before they have divorced
In the event that one party receives an inheritance after separation but before a financial settlement on divorce the same principles will apply – the money will not be ring-fenced but will be taken into consideration. However, the fact that the inheritance has been received post-separation is a factor that the court will take into account and is an argument that can be used to militate against those funds being invaded, save to the extent that they are required to meet essential needs.
Future inheritances
When the court is considering the distribution of assets the parties are required to disclose whether they have the expectation of receiving any inheritances in the future. Unless there is certainty that the inheritance will be received, (for example, where a country has forced inheritance rules) and that the inheritance is likely to be received in a relatively short period of time then it is likely to be left out of account.
Inheritance received after the parties have divorced
It is extremely important that parties are aware of the need to have a financial order made on divorce as well as obtaining a Final Order ending the marriage. If a court order dealing with the parties finances is not obtained then the claims each has against the other remain open and can be activated at any time.[2]
Therefore, it would be possible for one party to bring a claim against the other spouse after an inheritance had fallen in even if their divorce had been formalised many years later. Whilst the inherited assets might be regarded as a different class of non-matrimonial assets, the court may consider it just to invade them to meet the needs of the parties.
Conclusion
Whether the court will incorporate inherited assets into a financial settlement will depend on a number of factors as outlined above. The Family Court has a broad discretion to examine the particular facts of the case holistically and to seek a bespoke solution that is fair in the prevailing circumstances that exist at the point of separation. Inherited wealth cannot be considered to be excluded from the matrimonial pot automatically and the court may make orders that invade the inherited wealth. In the 2012 case of Y v Y the bulk of the available assets at the point of divorce was an estate inherited by the husband worth £27M. The judge awarded the wife £8.8.M, a little less than a third of the total value. The husband argued that such an order would force him to sell the estate but the judge was unpersuaded.
Whether you are seeking asset protection and require advice on a PNA, or you are separating and need advice on the courts likely approach on divorce, the family team at Payne Hicks Beach can assist and advise.
For further information, please contact Kelly Gerrard, Legal Director in the Family Department or, alternatively, telephone on 020 7465 4300.
To learn more about divorce, separation and family law visit our dedicated web page and download a free copy of our Essential Guide to Divorce and Family Law here.
[1] The third principle is compensation for relationship generated disadvantage.
[2] Provided they have not remarried.
