Family law considerations when passing wealth down the family

The recent budget may make it a tempting prospect to offload wealth to younger generations of the family long before death in order to make the process as tax efficient as possible.  

On the face of it, passing on wealth at an early stage makes perfect sense. However, if the intention is to keep funds “in the family”, the position may not be straightforward.

What happens on divorce?

Scots law requires divorcing spouses to share fairly any wealth which either (or both) of them have accrued during the period of their marriage (“the pot”), with the exception of anything acquired by gift from a third party (i.e. a person who is not one of the spouses) or succession. One might therefore be forgiven for thinking that assets acquired from older generations of the family ought to be perfectly safe if the beneficiary’s marriage ends. The truth, though, is that people rarely acquire assets and leave them in the state in which they are received. A gift of money, for example, may be spent on a new house, car or another “special something” they have always coveted. An asset they have been gifted may be sold and the sale proceeds used to purchase a newer model. Whilst it is likely to make the family happy to see the gift being enjoyed, problems can arise if the beneficiary finds themselves in a position where their then relationship later ends. By changing the form of the asset they were gifted, they have put it firmly “in the pot” for division upon divorce.

In such circumstances, arguments may be run to state that the source of funds used to acquire the “new” asset ought to be taken into account when working out how that asset should be divided. That will likely result in the asset being shared unequally between the spouses, with the intended beneficiary acquiring the lion’s share. That outcome does, however, rely on either the goodwill of the spouse or a court exercising their discretion favourably.

Business interests

Businesses interests can also cause difficulties. Bringing a child into the family business as a partner or shareholder is of course an exciting development. As long as the business remains in exactly the same form throughout the child’s marriage, the business interest will not form part of the matrimonial property for division (although other arguments may be made which go beyond the scope of this article). The difficulties arise, however, when (usually for tax reasons) a change is later made to the nature of the business. For example, a decision may be made to transition from a partnership to a limited company. If that change occurs, the shareholding becomes matrimonial property and will be included in the pot to be divided upon divorce. This is unlikely to be what was intended, particularly as the business may have been trading for many years (or even generations) before the divorcing couple even met.

What about those who are cohabiting?

The position is different for cohabiting couples who are living together without being married. There is no “pot” to be divided. Instead, a claim can be made if either of the parties can demonstrate that they have been financially disadvantaged in the interests of the relationship or in the interests of any child of the relationship. Alternatively, they will require to demonstrate that the person with whom they have been cohabiting has been advantaged by their contributions. Each cohabitant’s position will be considered at the beginning and end of the relationship. Clearly any gifts or inheritances can substantially change the financial landscape. Here, the biggest risk is a cohabitant making a spurious claim at the end of the relationship to elicit funds from their former partner. The temptation may be to give in to their demands to some degree to avoid protracted litigation and the associated costs.

Options to regulate matters

There is, however, a way to avoid all of this - by entering into an agreement. This can take various forms depending on the circumstances of the couple involved. A pre-nuptial agreement can be used to ring fence assets which are not to be included in the matrimonial pot for division on divorce. It can also make it clear that anything bought using funds derived from those assets will not be included. Likewise, the agreement can make it clear that gifted or inherited funds or assets will not be included in the pot, nor will anything acquired with funds derived from anything which is gifted or inherited. That provides financial freedom to those in receipt of wealth from third parties. If it is too late and the intended beneficiary is already married, a post-nuptial agreement can be prepared. That can deal with a very specific scenario (e.g. an interest in a company which is being transferred) or a more general situation such as agreeing that anything bought with gifted or inherited funds will be excluded from the pot for division on divorce. Similar agreements can be put in place prior to or during a cohabiting relationship to set out clearly what the position will be if the relationship ends.

Securing legal advice in relation to these issues at an early opportunity is crucial. Please get in touch with one of our family lawyers if you require assistance.