Divorce and inheritance - do I have to share it?

“All that I have I give to you,” I chortled during my wedding ceremony in a little country church early this century.  I tittered slightly as I said it, as did my side of the congregation, because I knew, and they knew, that all I had to give to my husband was a Peugeot 106 (bright green) and a midi hifi.  Frankly, he was welcome to it.  He wasn’t exactly rolling in money himself.

Most young couples are in similar positions when they get married.  They have their whole lives ahead of them, and great plans.  They’ll both work for a while and hopefully buy their own home. Once they’ve reached a certain stage, they might want to have children, so one of them will often take a back seat whilst the children are young, before returning to work full-time a bit later on.  The other one will carry on working full-time and, through their joint efforts, they will gradually pay off the mortgage, build pensions and start to look forward to retirement together.

Unfortunately, many marriages don’t make it to retirement before the unhappy couple go their separate ways. Divorce is such a difficult time, and so much more difficult when you don’t know if you can keep a decent roof over your children’s heads. Imagine then, when one of the couple unexpectedly receives an inheritance. They’ve already separated so, surely, the inheritance is irrelevant to the divorce.  Right?

Wrong.

The first thing to understand here is that, on divorce, there are two types of assets to be considered:  matrimonial assets and non-matrimonial assets.

Matrimonial assets

Matrimonial assets are those which have been accrued during the marriage, largely through the parties’ joint efforts.  The equity in the family home is the most obvious example, but a family business started during the relationship would be another.  The parties’ pensions, their savings, their cars, their jewellery – everything, essentially.

Matrimonial assets can also include non-matrimonial assets that have become matrimonialised.  For example, if one of them owned a house before they met each other, and the other person moves in, the equity in that house will transition from non-matrimonial to matrimonial property.

On divorce, matrimonial assets are subject to the presumption that they will be shared between the parties.  The starting point is equality, although there may be many good reasons why the end point might be different – one party needing more than the other being the usual reason to depart from equality, although the length of the marriage and one party’s contributions may be other examples.

The sharing principle does not apply to non-matrimonial assets.

Non-matrimonial assets

Non-matrimonial assets are those which come in from outside the marriage and might include:

• Assets which one party brings to the marriage – such as an existing business, property or investments;
• Wealth which is generated after separation – such as a significant active increase in the value of a business, or, to some extent, significant bonuses;
• And, of course, inheritances.

As noted above, the sharing principle does not apply to non-matrimonial assets.  Instead, they are to remain, undisturbed, with the person who owns them.

So why are they relevant?  Because what I’ve said above is subject to a very important caveat.  If both parties’ needs can’t be met from the matrimonial resources, then the court is entitled to take the non-matrimonial asset into account.  This doesn’t mean that it will be shared; it may only mean that the person with the inheritance doesn’t need so much of the matrimonial resources, leaving more of them free to meet the other party’s needs.

Take this example where inheritance is used to settle a divorce

A couple in their forties separate.  They have two children, now in their teens.  Their financial situation is straightforward.  They are both employed, working more or less full-time.  The equity in their family home is about £500,000.  They will each need about £650,000 to rehouse.  The husband can raise a mortgage of £350,000.  The wife can raise a mortgage of £200,000.

Clearly, the wife here is going to need nearly all of the equity with which to rehouse herself.  That wouldn’t be fair if the equity was all there was – apart from anything else, the husband wouldn’t be able to rehouse himself.

But the husband has recently inherited £200,000 With that, the remaining equity in the family home and his mortgage capacity, he can afford to buy a house for £650,000, and both parties will be rehoused adequately and to the same standard.

The matrimonial assets in this example have been divided very unequally in the wife’s favour, and there may need to be an adjustment later on in order to strike the balance of fairness – perhaps when the children gain their independence the husband might be entitled to some of it back.  Furthermore, the figures in this example all fit together very neatly, and it is unheard of for any real case to be quite so neat.

The point is that the inheritance is a resource available to the husband with which he can meet his own needs.

Would I have to share the inheritance on divorce?

Maybe.  But unlikely.

This is important, because misunderstandings about inheritances can really colour the way in which the divorce unfolds.  Naturally, people can feel extremely protective of their inheritance but for a client to have to directly share their inheritance with their ex-spouse, the matrimonial resources must be so limited that they do not cover the other party’s needs and the inheritance must be enough to make a practical difference.

Why should I disclose inheritance on divorce? Before the court can decide how to share the assets between you, it must know what is available, including non-matrimonial assets.  That doesn’t mean to say that the other party will get their hands on it; it just means that the court has to know about it.

Failure to disclose leads to all sorts of unwanted consequences.  First, any remaining trust between the couple will evaporate.  It may be necessary for huge amounts of additional disclosure to be provided, including the original Will file, any letter of wishes, and trust and estate accounts.  Executors may be summoned to attend court and solicitors forced to disclose their Will files.  It all costs a lot of money, and the end result is that either the inheritance has to be shared, or – most likely – it doesn’t, depending on the circumstances.  One thing is for sure; the inheriting party may end up paying a significant portion of the other party’s costs in addition to their own.

Bigger money cases

In cases where there is more than enough to go round, case law is quite clear.  So long as the other party’s needs can be met from the matrimonial (and their own) resources, your inheritance should be safe.  Beware an inflated “needs” case though, in which the other party seeks to claim that there is not enough in the matrimonial pot to cover their needs.  Expert advice should always be sought.

What if I inherited before we separated?

This may be more complex, depending on the circumstances.  The court would need to consider when you inherited and the extent to which, if at all, the inheritance has been matrimonialised.  If, for example, you inherited early on in a long marriage, the inheritance might be more likely to have been mingled with everything else.  In those circumstances, it could be subject to the sharing presumption discussed above.

Protecting inheritance on divorce

In order to protect your inheritance, or indeed any other non-matrimonial asset, from becoming matrimonialised, you need to ensure that it remains separate from matrimonial property. So, keep money in a separate account in your sole name; keep property in your sole name; don’t use the property for family purposes.

Remember that the sole purpose of retaining non-matrimonial status is to protect it from claims in cases in which there are not enough matrimonial assets to meet both parties’ needs.  If your case is one of those, there might be little to be gained from attempting to maintain non-matrimonial status since the court will take the assets into account in any event, not to share the inheritance with the other party, but to give them more of the matrimonial assets.

Furthermore, if income from the assets is used for family purposes, there is the possibility not only of matrimonialisation, but also of the assets being held in a nuptial trust.  Nuptial trusts are beyond the scope of this blog but be aware that the court may vary the terms of such trusts, meaning that, in theory, the court may order some of the assets to be directly advanced to the other party.

Inevitably, it becomes more and more difficult as time passes to maintain the barrier between non-matrimonial and matrimonial and many would accept that there is little point to having assets if you aren’t going to allow yourself to have any benefit from them.

Conclusion

In any divorce it’s important to take expert legal advice about your financial claims and those of your spouse.  When it comes to inheritance, it’s important to listen to what your lawyer tells you about its relevance and how it’s likely to be treated by the court – you might save yourself and your spouse a whole load of stress and legal costs.

If you would like advice about this, or any other matter concerning divorce or separation, please contact our Family Team on +44(0) 3333 231 580 or send us an email.