The Law Commission published its report on Technical Issues in Charity Law in September 2017 following a public consultation.
The treatment of inheritances and gifts on divorce
A big fear for some people facing divorce and the inevitable carving up of the matrimonial assets, is that monetary inheritances and gifts previously received from parents or other extended family, some or all of which may have been invested into assets held in the parties’ joint names, will either be shared or kept in their entirety by the other party as a consequence of the divorce.
They seek assurances that such assets will be “ring-fenced” and retained for them. Unfortunately, this is not something that can be guaranteed. Much may depend upon the financial circumstances of the parties, their ages, the length of the marriage and how these inheritances and gifts have been utilised and intermingled with other assets during the marriage.
The overarching principle in family law is that family assets will be divided between the spouses in accordance with their individual needs, irrespective of when and where the assets were acquired. There will be no “ring-fencing” of assets if a party’s needs dictate this.
By virtue of the Matrimonial Causes Act 1973, the family court is all powerful when determining the division of assets between spouses. It can transfer property ownership, pensions and other assets from one party to the other if it considers this necessary to satisfy needs, and to achieve fairness between the parties.
In the absence of a needs argument, inheritances and gifts may be retained for the recipient.
Full and frank disclosure
Another overriding rule of the family court is the requirement to give full and frank financial disclosure. Some participants in the divorce process mistakenly believe that they are not required to reveal assets that are held in their sole name or, in particular, if they have been inherited or gifted to them in the past. In the absence of them providing full disclosure, they are at risk of the court making costs orders against them if they are guilty of any omission in disclosure. Furthermore, any financial settlement that has been reached between the parties may be set aside by the court with further cost penalties, and, even worse, the defaulting party may be found to be in contempt of court.
In the case of White v White  2FLR 981, the concept of matrimonial property as opposed to non-matrimonial property was developed. If an asset was determined to be non-matrimonial property, it could be “ring-fenced” and retained for that party. The concept of non-matrimonial property was applied to inherited assets. The case emphasised, however, that such an argument would have little weight in a case where the financial needs of a party could not be met without invading that non-matrimonial property.
Thus, in practice, whether or not an asset is non-matrimonial is only likely to be of significance where the remaining assets are substantial enough to meet the needs of the parties.
Nevertheless, the concept of non-matrimonial property not being treated in the same way as property acquired during the marriage has evolved. As such the other spouse may have a weaker claim to such property. However, it should be emphasised that such an asset will not be free from disclosure and the court will ultimately decide whether the inheritance should be shared, and in what proportions, depending upon need.
In short marriages, inheritances, gifts and contributions of any kind, are more likely to be “ring-fenced” compared with longer marriages, bearing in mind that in longer marriages the parties’ assets are more likely to have been intermingled or mixed with other matrimonial assets to become matrimonial property. For example, if an inheritance has been put into a joint account held in the parties’ joint names and used to purchase furniture for the marital home then it is more likely to be classed as matrimonial property. On the other hand, if an inheritance has been invested and retained in an account held in one partys' sole name throughout the marriage, there will be a better chance for that asset to be “ring-fenced” and classed as non-matrimonial property.
Irrespective of contributions from inheritances or otherwise, if such monies have been used to purchase the matrimonial home, whether the home is held in sole or joint names, the home will be treated as matrimonial property to be shared between the parties. This can still lead to the court providing for an unequal division of the value of the property in favour of the party who has made the greater contribution.
Case law has drawn a distinction between different types of inherited property, for example, a dynastic ancestral castle may be treated by the court differently from an inheritance acquired during the parties’ lifetime. The former “ring-fenced” for the party and, therefore, for their successors, with the latter being invaded if needs and fairness dictates.
Where an inheritance has not already crystallised, the courts have been unwilling to attach much weight to the possible future inheritance because it is uncertain whether or not the expectation will be realised. Therefore, unless a testator has already died or their demise is imminent and/or where the inheritance will be substantial, inheritance prospects will rarely be given much weight.
In cases where assets are more than sufficient to cover the needs of the parties, complex arguments can ensue over what constitutes matrimonial property and what is a fair and proper distribution of the assets. Non-matrimonial property can include inheritances and gifts, but there are other categories of assets that can be described as non-matrimonial property, for example, assets acquired pre-marriage/relationship or post-separation. Irrespective of how they have been acquired, whether from inheritances, gifts or simply from a spouse’s own savings; these assets are not discussed further here.
The courts have been more likely to “ring-fence” inheritances and gifts from division between the spouses in circumstances where the marriage has been short and/or where those assets have not been intermingled with other assets and have not contributed towards the purchase of a family home.
The best chance of preserving an inheritance or monetary gift, is for those monies to be retained in the party’s sole name and for them not to be intermingled in jointly owned assets, such as the matrimonial home or used for other matrimonial purposes. This will be ignored, however, if the circumstances are such that those monies will have to be used to satisfy the needs of both parties.
If you have any questions regarding the issues raised in this article, contact Elisabeth Howe.
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