Inheritance and divorce – Do I have to share it?
Inheritance and divorce – Do I have to share it?
When couples get divorced, they have to divide their assets in the fairest possible way. But what does “fair” mean when one party has inherited a sum of money or property? Do they get to keep it all? What if the inheritance came in after the parties had separated? Do they still have to disclose it?
These are often difficult questions to answer morally, ethically and emotionally. Indeed, emotions often run so high around these issues that the couple may end up in court, the proceedings may go on for much longer, costs can increase disproportionately, and agreement becomes less and less likely.
That is why it’s so important for clients to understand at an early stage whether they can keep their inheritance, or whether they might have to share it.
The law on inheritance and divorce
The starting point for dividing assets on divorce is equality. There has to be a good reason to depart from equality, and any departure must be limited to what is needed in order to achieve fairness.
“Assets” in this context includes everything: houses, cash, investments, business interests, pensions, everything. It also includes interests in trusts, and assets which are expected to materialise in the foreseeable future (including, for example, an entitlement under the will of a person who has died).
But “assets” may be sub-divided into “matrimonial assets” and “non-matrimonial assets”. And the way in which each category is treated might be different.
Matrimonial assets are those which have been built up during the marriage, typically through joint endeavour, such as the equity in the family home, the value of a business started in the early years and pensions to which one or both of the parties has contributed over time. It doesn’t matter that one party may have gone to work and earned the money to pay the mortgage and make the pension contributions. The other party would have contributed in other ways, such as bringing up the children, which enabled the breadwinner to concentrate on earning the money. Their joint endeavour created whatever assets exist at the end of the marriage, and fairness requires that those assets should be shared equally.
Non-matrimonial assets are those which are not acquired through joint endeavour. They might be brought in at the start of the marriage by one party who was already wealthy. Or they might be received during the marriage by way of a gift or inheritance from a third party. Or they might be earned after the parties separated – perhaps in bonuses or restricted stock units.
If the matrimonial assets are sufficient to provide for both parties’ needs, non-matrimonial assets should not be disturbed. Whoever owns them should keep them.
Needs and non-matrimonial assets or “needs trump all”
In most cases, the matrimonial assets will not be enough to meet both parties’ needs. And, if one of the parties has non-matrimonial assets, it may be necessary for that party to “give up” some of those assets in order to meet the other party’s needs.
In those circumstances, the party with the non-matrimonial assets should only be asked to give up what is necessary, but that can still be tricky. For agreement to be reached, there has to be an acknowledgement that the assets in question are non-matrimonial. If that isn’t agreed, the other party may seek to lump them all into one pot, to be divided equally – or even in their favour.
But we are talking about inheritances, which might be matrimonial assets, or non-matrimonial assets, or even a mixture of the two.
If, for example, a wife inherited a property, and the couple moved into that house, so that it became their family home, there would be a presumption that the house has become matrimonial property and that its value should be divided equally between them. That presumption would strengthen over time.
If, as another example, the wife inherited an interest in a property after the parties had separated, that would almost certainly be non-matrimonial property.
Now supposing the wife inherited one third of her mother’s estate, which comprised a house and a substantial amount of cash, and she received the cash during the marriage. She used some of the cash for the benefit of the family, by paying for holidays, improvements to the family home and generally supplementing their income. The pot of cash might be deemed to have become matrimonial by virtue of it having been “mingled” with the family finances. As matrimonial money, it would be subject to the presumption of equality or the “sharing principle”. On the other hand, the wife’s interest in her late mother’s house is never mingled. They never live in it, nor derive any benefit from it. Subject to the matrimonial assets being sufficient to meet both parties’ needs, that interest will remain non-matrimonial, and will not be subject to the sharing principle.
The advice is simple in these circumstances: avoid mingling your inheritance with the matrimonial finances. Keep it separate. Keep cash in an account in your sole name and avoid using it for family purposes. Don’t live or holiday in inherited properties. If you receive rent from such properties, have the rental income paid into a separate account in your name. This advice applies whether you receive your inheritance before, during or after the marriage.
In my experience, there is often resistance to disclosing an inheritance. Even where the inheritance itself can’t be avoided, the spouse may be reluctant to disclose details. That can be really unfortunate, since the perception that someone is avoiding giving proper disclosure can scupper any chances of an early settlement. Avoidance tends to breed mistrust, and mistrust always breeds higher costs.
You will have to disclose your inheritance, and in order to maintain trust and keep costs to a minimum, you should do so at an early stage and be as open as possible about it. This can be extremely difficult. It feels private, nothing to do with the other spouse. Questions about it can feel really distasteful and intrusive. However, failure to disclose will, in the end, cause more trouble.
So long as the inheritance has maintained its non-matrimonial character (see above), it might be open to you to argue that it should not be touched. In order to succeed in that argument, you will need to be able to demonstrate that the matrimonial assets are enough to meet at least the other party’s needs without deviating too far from equality.
So what’s the problem?
The problem is that we are human.
We are generally fond of our parents, and we might attach extra significance to the money and property we receive from them – particularly if the property in question is the old family home in which we grew up! It feels completely wrong for our estranged spouse to have any part of this. Indeed, our late parents would turn in their recently-dug graves if they thought for an instant that their loathed son- or daughter-in-law would be getting a penny.
Our instinct might be to hide the inheritance or, if we can’t hide it, to minimise it and delay it.
Hiding an inheritance
You might think it difficult to hide an inheritance, but with a little forethought it can be attempted. Take the wife whose mother is dying, and who knows that her daughter is in the process of getting divorced. She goes to her solicitor and instructs him to change her will. “I want to leave everything to my other daughter,” she says. A new will is drawn up and, when she dies, her other daughter cops the lot, leaving the wife both heartbroken and disinherited.
But wait, says the husband, pointing to the will. In fact, half of the estate is placed in trust, with the wife being one of the beneficiaries. “Did the mother write a letter of wishes?” asks the husband. After months of legal wrangling, third party disclosure orders and trustees being summoned to court, finally a letter of wishes is disclosed. It confirms that the wife’s late mother instructed her other daughter “behind the scenes” to ensure that the wife got her half share of the estate once the divorce was over.
Such a letter of wishes is not enforceable, but is strong evidence on which the divorce court can base its finding that the wife will in fact inherit half of her late mother’s estate.
Meanwhile, the wife has incurred significant additional legal costs, and she has forced the husband to do likewise. She will find herself liable not only for her own additional costs, but also those of the husband.
If only she’d been open from the start. She could have claimed non-matrimonial asset protection, and negotiated on the basis that there was no need for her to give up any part of it (if the matrimonial assets were sufficient to at least provide for the husband’s needs). At the very least, the parties could have negotiated in good faith and had a fighting chance of reaching agreement. Hiding the inheritance blew any chance of that and cost loads more.
Minimising and delaying
Here, the husband’s mother has died, shortly after separation. The husband is not an executor and claims not to know the terms of the will. If he’s a beneficiary, he’s entitled to a copy of the will, but he might have to be encouraged to ask for it.
Eventually, the will is disclosed, and it says that the husband is entitled to one third of the residual estate after payments of a few specific legacies. He claims to have no idea how much the estate is worth. Yes, there is a house, but he doesn’t know how much it’s worth.
The estate is worth less than the nil rate band, so no inheritance tax is payable. There are no time limits for submitting estate accounts. The executors (the husband’s brothers) might suddenly find they don’t have the time to administer the estate. No accounts are prepared and nothing is done to sell the house.
Meanwhile, the divorce is grinding on. The wife wants to negotiate a settlement. The matrimonial assets aren’t enough to meet both parties’ needs and she needs to know how much the inheritance is worth.
Three years later, at trial, the court decides that, as the estate is worth less than the nil rate band, it can draw its own inferences about the value of the husband’s inheritance. It sees that the husband’s failure to obtain the necessary information racked up costs and caused delay. In effect, it prevented the parties from reaching agreement. Husband is ordered to pay wife’s costs.
If only he’d been up front from the start. He might have persuaded the court that the value of his inheritance made little difference to the outcome. If the wife had been able to trust his disclosure, he might even have been able to settle the case, saved himself a load of costs and kept his share of his late mother’s estate.
Emotion vs Logic
A party’s special attachment to inherited assets is very understandable. Indeed, they might even feel disloyal to their dearly departed benefactor by – as they see it – giving some of their inheritance away to the despised ex-spouse. I have seen a wife break down in tears in the witness box at the idea of not being able to carry out her mother’s dying wish to ensure that the husband got nothing.
However, I wonder how much heartache and costs might be saved by the application of a little logic. In many cases, there is absolutely no question of the spouse getting anything from the inheritance. No way. The beneficiary will keep his or her inheritance intact. No need to worry, disclose it and get on and negotiate a settlement.
What stops them? Parties often feel that questions about the inheritance are invasive and insensitive. They feel that the other spouse is asking about the inheritance in order to get their hands on it. They instinctively try to withdraw from the questions and to protect the inheritance to which they feel so attached.
What they may not understand, and what they need to be advised clearly about as soon as possible, is that the questions are not necessarily designed to further the other party’s claim against the inheritance; they are asked in order to find out how much the inheritance is worth. Why? So that it can be weighed up against the matrimonial assets, balanced against the parties’ needs and established as a resource which the inheriting spouse may have available to them in order to meet their own needs.
What does this mean? Let’s take some examples:
- A divorcing couple has assets worth £5 million. After separation, the wife inherits £250,000. The matrimonial assets are enough to meet their combined needs. There is no need to raid the wife’s inheritance. She gets to keep it intact.
- A divorcing couple has assets worth £1.5 million. After separation, the wife inherits £250,000. The husband (who is the home-maker) needs total £1 million. He gets that from the matrimonial assets. He gets more than half because he needs it – remember the “needs trump all” argument. The wife only gets £500,000 from the matrimonial assets, but keeps her inheritance intact – £750,000 in total, which meets her needs (she has a large mortgage capacity, so needs less capital with which to rehouse herself).
- A divorcing couple has assets worth £1 million. After separation, the wife inherits £200,000. They each need £600,000. Husband gets £600,000 from the matrimonial assets. Wife only gets £400,000, but keeps her inheritance intact (£600,000 in total, which meets her needs).
The crucial detail is that there is no transfer to the other spouse of any part of the inherited assets. The matrimonial assets might be adjusted away from equality in order to meet the parties’ respective needs, taking into account the fact that one of the parties has an additional resource, but there is no requirement for the inheriting spouse to pay any part of their inheritance to the other spouse.
It can be difficult, in the heat of disclosure, in the aftermath of the death of a loved one, in the throes of a painful divorce, to appreciate this very important detail, but it is absolutely essential, if there is to be any prospect of an early settlement, to ensure that clients do understand it.
When might the other spouse get their hands on my inheritance?
Short answer: when their needs trump all your arguments about non-matrimonial property. There may also be other circumstances. Let’s take some more examples:
- After a long marriage, a divorcing couple has no assets, save for equity in their family home – £150,000. They each need £200,000 with which to rehouse. The wife inherits £300,000. The husband gets all of the equity in the family home, plus £50,000 from the wife’s inheritance. The wife keeps the balance of her inheritance (£250,000).
- After a very long marriage, a divorcing couple has a family home worth £500,000 net, including a granny annex which was added 20 years ago to house the husband’s mother, who died recently, and who had become increasingly dependent on the couple for her care. Granny paid for the annex, and ownership of the house is subject to a declaration of trust recognising her investment. Granny leaves her entire estate to the husband, including her interest in the house. There are many reasons why her interest in the house might form part of the matrimonial assets, including:
- The family home, including the annex, is subject to the sharing principle;
- Granny’s interest in the property had become matrimonialised;
- After such a long marriage, during which the wife had supported granny, it would be wrong to treat her interest in the house as anything other than matrimonial property.
- A divorcing couple has very little in the way of assets, but not too long after they separate, the wife inherits £500,000. Although they were renting during the marriage, they could each buy a house if the inheritance is shared. There are two young children who would benefit from living in houses which their parents owned, rather than living in two rented properties with all the uncertainty and lack of control which goes with that. The inheritance is shared in such a way that they can each buy a house. The wife gets more – not because it was her inheritance, but because, with a smaller mortgage capacity, she needs more capital.
There are circumstances in which inheritances will be shared, when the other spouse will actually receive part of the inherited property itself. In those cases, early recognition of the reality will assist the lawyer in advising the inheriting client, and the client to accept that in order to save costs and settle early, they are going to have to share nicely.
In many other cases, however, the reality is that the inheriting spouse will probably not have to share their inheritance, and in these cases, they should be advised clearly that there is little to be gained – but a great deal to be lost – from giving late and/or incomplete disclosure.
In cases where the matrimonial assets are insufficient to cater for both parties’ needs and there needs to be an adjustment of the matrimonial assets in favour of the non-inheriting spouse, the inheriting spouse needs to understand as early as possible the difference between being asked to share their inheritance (physically handing over some of it to the other spouse) on the one hand, and, on the other hand, the non-inheriting spouse getting more of the matrimonial assets to meet their needs, whilst the inheriting spouse keeps both their remaining share of the matrimonial assets and their inheritance intact.
In all cases, an early understanding of the risks and clear advice will help the client to manage their case in such a way as to maximise the chances of an early negotiated settlement whilst minimising their costs.
If you have any questions on the topic of inheritance and divorce or indeed any other financial settlement queries please contact Rachel Osgood or visitor the Family section of our website for more information on the services we can help you with.