Divorce and Inheritance

Family solicitor Robin Charrot examines divorce and inheritance and offers advice on how the court resolves divorce financial settlements involving inheritances.

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Divorce and inheritance issues

For many young couples, it is a real struggle to get on the property ladder. The combination of house prices and the increase in the cost of living has made homeownership an uphill battle for most young married couples. Frequently, parents and in-laws provide gifts or loans to help young families buy their first home or move to a larger family home. Alternatively, a young couple may be helped if one of them receives a substantial inheritance from a parent or grandparent.

When a couple separates and initiates no-fault divorce proceedings, one stumbling block to reaching an agreed financial settlement is where either spouse has received an inheritance or is likely to receive a substantial legacy in the future.

Protecting inheritance from divorce

There are ways to protect an inheritance from divorce financial claims. Examples of how to protect an inheritance from a financial claim include:

1. Signing a prenuptial agreement.
2. Signing a postnuptial agreement.
3. Creating a discretionary trust.
4. Keeping the inheritance separate.

Relationship agreements and protecting inheritances

A prenuptial agreement is relevant if you are engaged and have not married. If you are married, you can sign a postnuptial agreement to protect assets from divorce financial claims.

Prenuptial and postnuptial agreements can be limited to ringfencing the inheritance, so the spouse who inherited the money from their side of the family keeps it if the couple splits up. Alternatively, the agreement can be comprehensive and set out your agreed financial settlement in the event of a separation. Either type of relationship agreement only works if safeguards are in place to protect both parties, such as financial disclosure and independent legal advice.

Trusts and protecting inherited monies

The creation of a discretionary trust can be effective in protecting an inheritance from divorce claims. Setting up a discretionary trust requires specialist private client and estate planning advice.

Inherited monies classed as non-family wealth 

If you have received an inheritance, one way to keep it out of any future divorce financial settlement is to decide not to share the money with your spouse. This strategy does not always work. Whether it is feasible to keep money separate depends on the extent of your other assets, the length of your marriage, and several other factors.

Keeping inherited money separate from your husband or wife means keeping it in a sole account, not placing it in a joint account, and not using it to pay off the mortgage on the family home or to invest in the family business. The court will decide in financial court proceedings whether the money falls within the definition of family money or is non-family wealth. The asset can also be referred to as a non-marital asset.

If a court concludes that an inheritance qualifies as a non-marital asset, the court will not share the inheritance as part of the financial settlement unless it is necessary to do so. It will be necessary to do so if your spouses’ and the children’s needs cannot be met without recourse to the non-marital asset.

Non-family wealth – the practicalities

Family lawyers recognise the difficulties of keeping inherited money separate from shared funds. Keeping an inheritance separate from your wife’s funds or in your sole account may conflict with financial advice or tax advice.

For example, from a financial standpoint:

1. It may be best to pay off the mortgage on the jointly owned family home mortgage rather than keep your inheritance in a bank account or in investments in your sole name, or
2. From an income tax perspective, it may be best to make use of your ISA allowance and the ISA allowance of your husband or wife.

The professional legal, financial, and tax advice is correct but conflicting. That’s because each professional addresses the inherited funds from different angles. A family law solicitor can assist you in working out the option that best suits your needs and priorities.

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Inheritances and financial disclosure when negotiating a financial settlement

In financial settlement negotiations and court proceedings, there is often an assumption that inherited money or inheritance and trust prospects do not need to be disclosed to your spouse or to the court. However, all husbands and wives must provide complete and frank financial disclosure.

If you do not disclose an inheritance, it can result in:

1. Your spouse being suspiciousabout other financial aspects, such as the value of the family business or the extent of your income. This suspicion makes it less likely that you can reach an agreed divorce financial settlement.
2. In the financial proceedings, the court being asked to make inferences about your honesty. The court could be asked to infer that you have additional undisclosed wealth because you did not initially disclose the existence of an inheritance or a trust.
3. If a financial court order is madeand it subsequently comes to light that you had received an inheritance or were a discretionary beneficiary of a trust, your spouse can ask the court to review the order and make a new one based on the argument that the court would not have made the original order if you had disclosed the existence of the inheritance or the trust.

Family solicitors recommend that if you have received an inheritance or if you are named in a Will or a trust, you discuss your financial disclosure with a specialist divorce financial settlement solicitor before you start financial settlement negotiations, attend family mediation, or complete Form E financial disclosure as part of the divorce financial settlement court process.

Disclosure of inherited monies and inheritance prospects

Even if the advice is that you must disclose the inheritance, you can still argue that the inheritance should not be considered in the divorce financial settlement. For example, because you have not received the legacy yet and the testator may change their Will or because although the inheritance has been received, the inherited money did not become marital property because of the existence of a prenuptial agreement or as a result of the money being kept separate.

Many future inheritances can be safely ignored and will be disregarded by the court. For example, if you are getting divorced in your 20s and your parents have named you as a beneficiary of their Wills but they are in their 60s and fit and healthy. Why? Firstly, you may not inherit for another 30 years, and secondly, by the date of their death, they may have spent your legacy or decided to leave it to a charity.

The relevance of a future inheritance may be different if you and your spouse are in your 60s and you are divorcing after 30 years of marriage. An imminent inheritance could be relevant if there is insufficient equity in the family home to rehouse you both or to meet your retirement needs. The inheritance could mean your spouse gets more of the equity or pension share than would have been the case if you were not due to imminently receive a substantial inheritance or had recently received it.

Divorce, inheritance and protecting family wealth

Divorce and inheritance can be a very emotional topic. Invariably, people want to protect an inheritance because they believe it is family money left to them and that their relative would not want their estate shared with their former spouse. Divorce financial settlement solicitors and estate planning lawyers can guide you and your family on your options.

For expert advice on divorce and family law, call our team of specialist divorce lawyers or complete our online enquiry form.