How to protect your Inheritance from a divorce settlement

How To Protect Your Inheritance From A Divorce Financial Settlement

As people find it harder to save for retirement, not to mention getting on the housing ladder, inheritances are becoming increasingly important, especially for the children of the baby boomer generation, as many of the latter benefitted enormously from the dramatic increase in house prices over the past three decades and have passed (or are planning to pass) this financial windfall on to their children. Therefore, the issue of whether or not inherited wealth becomes part of a financial settlement during a divorce can be highly contentious.

Given the circumstances mentioned above, individuals with substantial wealth, either currently or anticipated through inheritance, naturally seek to ensure its classification as separate from the joint assets and property pool in financial settlements following a divorce.

Is an inheritance considered matrimonial property?

Without a Pre or Post-nuptial Agreement, assets acquired during a marriage or civil partnership are generally deemed matrimonial property and subject to division upon divorce or dissolution. However, inheritances differ in treatment, as they are not automatically categorised as matrimonial property.

The landmark family law case of White v White [2000] UKHL 54; [2000] 3 WLR 1571 affirmed the separation of inherited wealth from matrimonial property. Lord Nicholls emphasised the distinction between property acquired before marriage, inherited property, and matrimonial property, recognising that these categories should not necessarily be treated the same way in the event of a marriage breakdown.

Does this mean my inheritance is secure from the financial settlement in a divorce?

Not necessarily. The Court must consider various factors outlined in section 25 of the Matrimonial Causes Act 1973, including income, financial resources, needs, obligations, standard of living, age, duration of the marriage, physical or mental disabilities, contributions to childcare, and any relevant conduct. If the needs of both parties cannot be met without utilising part or all of the inheritance, it may be included in the joint property to be divided.

What other factors could lead to my inheritance being considered matrimonial property?

Several factors may lead the Court to rule that an inheritance is matrimonial property rather than separate. These include the length of the marriage, the intermingling of assets, and the use of inheritance funds for family home purchases.

There are no strict rules regarding the treatment of inheritance; it depends on whether a fair settlement can be achieved without using inheritance funds. The inheritance will likely be included if the matrimonial property and assets are insufficient to meet the parties' needs, especially if young children are involved.

Can a promised inheritance be classified as matrimonial property?

Received inheritances and potential inheritances are treated differently. An inheritance already received unquestionably represents a resource accessible to the receiving spouse. This is not the case if the inheritance is something that 'may' be received in the future.

Nonetheless, the Court should acknowledge that in the instance of a potential inheritance, people can alter their Wills at any point. Therefore, unless the likelihood of such an inheritance is imminent and assured, discussions between spouses regarding whether it should become part of the financial settlement must be approached with caution.

What is essential in cases where one spouse knows they are likely to receive an inheritance in the future is to have a Consent Agreement in place. Failure to do so could result in your ex-spouse making a claim on the inheritance sometime in the future.

What is a Nuptial Agreement?

A nuptial agreement is a contract between two people before they wed (known as a pre-nuptial agreement) or after marriage (a post-nuptial agreement). People entering into a Civil Partnership can also make a Nuptial Agreement (referred to as Pre-Civil Partnership Agreements or Pre-Registration Agreements). For simplicity, in this article, Nuptial Agreements also refer to Civil Partnership Agreements.

Nuptial Agreements determine how particular property and assets will be treated should you and your spouse divorce. This is done by defining property as marital property and non-matrimonial property or as joint property and separate property.

Non-matrimonial property (or separate property) usually includes:

• Assets owned before the marriage.

• Inherited assets.

• Gifts received by one party during the marriage.

• Income received from investments or a family trust.

Drafting a pre-or post-nuptial agreement offers an opportunity to safeguard your inheritance in a divorce settlement. Although not legally binding, the Court may give substantial weight to the agreement's contents if certain safeguards are in place. Please get in touch with our office for further discussion or any points raised in this article.

If you have any questions regarding this article, please call us on 0300 3732424.