Inherited Wealth Within Divorce Proceedings
Article updated: 6th September 2024
The treatment of inherited wealth upon divorce has been the focus of much discussion in recent years and it is true to say that there is no singular approach adopted by the courts. Some judges adopt a “formulaic” approach to the division of matrimonial and non-matrimonial assets, whilst others favour an “impressionistic” and less prescriptive approach.
What is inherited wealth?
Inherited wealth is a form of non-matrimonial asset. It is wealth received by a party before or during a marriage, or indeed post separation, that derives from a third parties’ estate upon their death or forms a lifetime gift. Inherited wealth, whilst not specifically referenced in Section 25 of the Matrimonial Causes Act 1973, falls to be one of the factors that the court will have regard to when contemplating the division of assets on divorce. The court seeks to determine what is fair and will have regard to all the relevant circumstances of any particular case.
Is Inherited Wealth ringfenced?
Whilst inherited wealth exists in its own specific category and will be treated differently to wealth accumulated by the parties during their marriage and as a result of their joint efforts, inherited wealth is not automatically excluded by the court. The parties respective need is the overriding consideration of the court and, as such, if a particular parties’ need cannot be met from matrimonial assets, the court will look to any inherited wealth.
If, however there are sufficient matrimonial assets to meet the party’s needs, then inherited wealth will in all likelihood be ringfenced.
Mingling!
Inherited wealth that has been absorbed into the parties finances is less likely to be ringfenced by the court, such as an inherited property that becomes the family home or monies invested into a business that provides an income for the parties. The court will be concerned with whether the inheritance in question has become part of the economic life of the parties and / or whether there has been any agreement to share.
If the inherited wealth has been retained by one party and remains separate and distinct from the matrimonial assets, then the court is likely to treat it as such, subject to the overriding requirement of the court to consider the parties’ needs.
Much of the case law concerns itself with the nature of the inheritance, and whether there is any dynastic quality or particular significance attributable to the wealth that sets it apart.
Wealth inherited before marriage
It is not uncommon for a party to a marriage to have inherited property or a business prior to marriage, which then grows in value throughout the parties marriage and will continue to grow in value post separation. In regard to business assets, the court is likely to consider the latent and passive growth of a business, as well as whether there has been any “springboard” or catalyst. This is with a view to applying appropriate weight when balancing the distribution of assets and distinguishing the wealth accrued at the relevant times and as a result of efforts prior to and during the marriage.
Can inherited wealth be protected?
It would be advisable for a party to a marriage to consider entering into a Pre-Nuptial, or Post Nuptial, Agreement to define any inherited wealth that they seek to protect, in the unfortunate event of a relationship breakdown. Nuptial Agreements willingly entered into by both parties, who are each aware of the other’s financial circumstances and have had the benefit of independent legal advice, are likely to be upheld by the court. This is subject to the Nuptial Agreement taking into consideration the respective parties needs and the circumstances of the case rendering it fair.
Parties who are not married may wish to consider entering into a Co-habitation Agreement.
Future Inheritance
The court is unlikely to take a party’s future inheritance into account, as a result of the testamentary freedoms that are enjoyed by individuals, certainly in this jurisdiction, with it being open to any person to change their Will when they wish (as long as they have capacity). For the court to consider a future inheritance, the receipt of the inheritance would need to be as good as certain.
Conclusion
When considering inherited wealth, the court will essentially look at “timing” and “treatment” – when was the inheritance received, what is the duration, and how has it been treated by the parties. The court will also consider its liquidity.
The courts have an enormous discretion and whilst some judges will look to ringfence inherited wealth/non-matrimonial property and apply what is known as the “yardstick of equality” to the matrimonial property, subject to need, others will take a more broad-brush approach and carry out a less prescriptive cross-check. The court’s ultimate aim is however to achieve fairness in all the circumstances of the case.
It is possible to take steps to protect inherited non-matrimonial wealth, by entering into a Nuptial Agreement that provides for needs to be met and has been properly entered into, with both parties having the benefit of legal advice and full financial disclosure of the other party’s assets.
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