Protecting inheritance from divorce

It is often the case that, in the context of a separation and divorce, concerns are raised by one of the parties as to the other’s ability to make claims in respect of their received or prospective inheritances.

Many consider that inheritances ought to be ringfenced on divorce for the party to whom it has been left, but the law is not that straightforward. However, there are steps which can be taken to minimise the risk of inherited assets being “invaded” in the event of a divorce.

Let us look briefly at the law and what can be done to give an individual the best chance of protecting inheritance from divorce.

The starting point in law is that the assets acquired during the marriage through the joint efforts of the parties will form the “matrimonial property” and are subject to the sharing principle, which means they ought to be divided equally between the parties.

An inheritance received by one party should not usually, absent other factors, be considered matrimonial property and, therefore, should not be subject to sharing. The court distinguishes between matrimonial assets and non-matrimonial assets. It has been recognised in case law that a party should be allowed to retain non-matrimonial property, brought into the marriage at the outset, inherited or gifted during the marriage if the other party's financial needs can be met without recourse to those assets.

This is where it becomes more complicated. Even if an inheritance is considered non-matrimonial property and is, as a result, not subject to the sharing principle, the needs of the parties may trump this point, requiring it to be invaded. In any event, it can also be taken into account as a resource of the party who holds it and, while they may be allowed to retain the inherited assets, the other party may receive more of the other matrimonial assets in order to meet their own needs.

Whether an inheritance remains non-matrimonial or becomes matrimonial in nature over time will depend upon how the parties have managed their financial affairs, how long it has been since the inheritance was received and what has been done with it. Non-matrimonial property can become ‘mingled’ with matrimonial property over time, changing its nature and increasing the likelihood it will be subject to sharing. For example, if this has been used to invest in the matrimonial home, regardless of whether this is in the parties’ joint names or not.

There is also a distinction to be made between inheritances received and prospective inheritances. An inheritance which has already been received is undoubtedly a resource which that party has access to. However, the court ought to recognise that, in the case of a prospective inheritance, people are free to change their will at any time and so, unless such an inheritance is imminent and guaranteed, arguments about such assets should be treated with caution.

The best ways to protect one’s inheritance from divorce are:

1. To keep any inheritance separate from the matrimonial assets. Do not utilise those assets for the joint benefit of both parties nor invest this into joint property (or even a property in one’s sole name if this will be the matrimonial property).
2. Maintain careful records which show the source of the funds and which show that this has not been mingled in with the joint assets. This can be particularly useful where an inheritance has been received many years before a divorce.
3. Undertake careful estate planning to create additional layers of protection and ensure that professional advisors understand the need to protect an inheritance from a potential divorce. Otherwise, that estate and/or any tax planning may involve transferring assets or putting them in joint names.
4. Take legal advice on one’s particular circumstances. A family lawyer can advise on the likely exposure of an inheritance. For example, if the inheritance forms a substantial part of the assets in a particular case, it may be much more difficult to protect and careful strategies may need to be adopted.
5. Put in place a pre- or post-nuptial agreement. This is the best option for protecting inheritance from divorce as it will determine which assets are considered matrimonial and non-matrimonial, and what should be shared or retained in the event of a divorce.

Adam Maguire is a partner in the Clarke Willmott family team.