For those who have inherited wealth, it is natural to consider safeguarding this in the event of death but fewer perhaps consider safeguarding in the event of divorce.
Any family lawyer will tell you that, when it comes to dividing assets, the mention of inheritance unintentionally making its way into the matrimonial property pot can often be a sore point in discussions. To understand how this might happen, it is important to consider, firstly, the legal starting point when it comes to inherited funds and matrimonial property, and secondly, the circumstances which might cause an inheritance to become at risk in the event of separation or divorce.
The Starting Point: Is inheritance automatically protected?
When a married couple decides to separate, one of the first things to determine is the extent of the matrimonial property which will be divided. Generally, any assets or liabilities which have been built up during the marriage will be included subject to some exceptions. These exceptions are: any assets acquired before the date of marriage (other than a property acquired for use as a family home); any gifts made to either party during the marriage from a third party; and any inheritance received by either party.
This means that, as a starting point at least, any inheritance received before the marriage or during the marriage would be excluded from the matrimonial property to be divided on divorce, assuming that the inheritance has not changed in form. Similarly, any inheritance received post-separation will not form part of the matrimonial property
When do inherited funds become matrimonial?
As family lawyers, we talk a lot about “conversion” or “intermingling” of assets which is generally what causes non-matrimonial funds (such as inheritance) to become matrimonial property during the course of a marriage. The easiest way to capture this is by considering a practical example.
A wife receives an inheritance a few years into a happy marriage. She uses this money to buy a car for the family. A few years later, husband and wife decide to divorce. When the money was inherited, it would not have been matrimonial property. The difficulty arises because the money has then been spent on a car, which was acquired during the marriage, meaning that the value of the car will be taken into account when considering the net value of the matrimonial property. Through the purchase of the car, the inherited funds have been “converted” into matrimonial property which will be shared on divorce.
In this scenario, the wife would have a basis for arguing that, because the source of the funds used to buy the car were not matrimonial this would justify the exclusion of the value of the car (or at least a proportion of it) from the matrimonial property pot.
The above is a very simple example, but it is important for individuals to bear in mind that these types of arguments can become extremely complex depending on the types of assets involved or where a number of transactions have taken place over time. They can also result in a wide range of different outcomes, given the high degree of discretion afforded to the family courts in determining such matters.
How can inheritance be protected?
The best way of protecting inheritance from falling into the matrimonial property pot is a pre-nuptial agreement, commonly known as a “pre-nup”. This can ringfence assets purchased during the marriage, but funded from inherited or pre-marital wealth, by keeping them separate from the matrimonial property to be divided on separation or divorce. For parties who are already married, a post-nuptial agreement (or a “post-nup”) can serve the same purpose. It can also be used to alter the terms of a pre-existing pre-nup; to regulate a specific transaction which is due to take place during the course of the marriage; or otherwise to ringfence an inheritance which is received during that time. The scope of a pre-nup or post-nup will very much depend on the wishes of the individuals concerned, and such agreements can be tailored with that in mind.
Should you or one of your friends, family members or contacts require further information, please get in touch with our family law team.
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Solicitor
