A law firm which offers more

Call us: 0113 246 0622

How Inherited Wealth is dealt with by the Courts

Comments

When a couple divorce, either party may apply for a financial order from the courts to resolve the financial position. The courts have the power to make various orders under s. 23-24 Matrimonial Causes Act (MCA) 1973.

 Where the assets exceed the needs of the parties, the court will start from a position of equality (White v White[1]). Various factors will be considered which may then cause the court to depart from a 50/50 split. First and foremost, the welfare of any dependent children in the family will be considered. Other factors include the length of the marriage and any period of cohabitation prior to the marriage, the parties’ reasonable needs and expectations, the earning potential of the parties, and other specific circumstances of the case the Judge considers relevant.

 The courts may, for example, determine that a 50/50 split would not be appropriate where the marriage had been particularly short and/or there were no children to the relationship- in such a case, the court may instead split the assets in accordance with what each party had prior to the marriage.

 Inherited wealth

One factor that will be considered as a relevant circumstance of the case is inherited wealth. As any inherited wealth has not been generated by the joint efforts of the parties, the court has a wide discretion in relation to it, and will take a cautious approach in determining how it should be dealt with.  

 Judges may be inclined to ignore inherited wealth where it hasn’t originated from the marriage itself and has been kept totally separate from other marital assets. If the inherited wealth has not been utilised by the couple then the court often feels it would be unjust to utilise it when the marriage has ended. It is important to note, however, that where the inherited wealth has been used to support the couple throughout the marriage and to provide a certain standard of living, then the court will take a different view. Similarly, if the inherited wealth has been mixed with and used alongside other assets then it will be harder to protect the inheritance from being treated as a marital asset. If the inherited wealth has been used to purchase the marital home, or indeed the inherited asset is the marital home itself; in such circumstances it is likely to be considered an asset of the marriage and be available for the Judge to distribute as thought fit.  The court will consider the nature of the asset- cash or investments are likely to be viewed differently from a family business that has been passed through the generations, or an ancestral heirloom. The court is primarily seeking to provide a fair settlement to both parties.

 Where the inheritance concerned occurs after the end of the marriage but prior to any financial order being agreed, the court may treat it in the exact same way. If the inheritance has been expected and has influenced the spending of the couple during the marriage, then it may be shared by the court. When considering any future inheritance, the court works on the principle that inheritance prospects need to be ‘real and imminent’ to be considered. 

 In Miller; McFarlane[2], three principles were established: the parties’ relationship-generated needs (generously interpreted), compensation for relationship-generated disadvantage and sharing of the financial fruits of the relationship. The latter was described in Charman v Charman (No. 4)[3] as an ‘equal sharing principle’, i.e. “…that property should be shared in equal proportions unless there is good reason to depart from such proportions”

 Recent case law

Lord Justice Ward in Robson v Robson[4] offered the following guidance:

 It is worth noting that s.31 MCA 1973 gives the court power to vary or discharge certain financial orders. This is important as it means that the court can revisit earlier decisions and make changes, for example if one party suddenly inherits additional assets and the other party was not aware this was due/imminent at the time of the settlement agreement or order. The case of W v W (Periodical Payments: Variation[5]) is a good example of this.

 L v L[6]- the court will need to see a good reason to depart from the 50/50 split.

 Jones v Jones[7]- gifted and inherited assets could provide good reason to depart from equality within the application of the sharing principle.

 N v N[8]- the husband’s shareholding in the family business, gifted to him by his family, was protected from the 50/50 principle established in White v White[9] and the wife was given only 25% of his interest in the business. The court highlighted that different percentages could be applied to different assets, so there didn’t need to be a blanket 50/50 split. The idea of fairness should be considered in relation to each specific asset.

 K v L[10] emphasised the principle of fairness, rather than equality- where the inherited wealth had never influenced the modest lifestyle of the parties and had never been utilised by them, the offer of 5 million pounds for the husband from the wife’s 57 million inheritance was considered to be fair.

 As demonstrated above, the cases that have followed White v White[11] and Miller; McFarlane[12] have given further guidance on the approach the courts take in cases involving inherited wealth. Ultimately it would seem fairness is the main goal, which allows a lot of judicial discretion.

Implications for Family lawyers

In the majority of cases, the discussion above will be irrelevant and inapplicable; most divorcing couples do not have a ‘pot’ of marital assets that exceeds their needs. White v White[13] clearly stated that the fact property was inherited would be of little relevance where the needs of the parties could not be met without recourse to it.

 However, for divorces that involve couples who have more assets than their needs dictate, the position is flexible and decided on a case-by-case basis, focusing on the principle of fairness.

 s. 25 MCA 1973 is still utilised to assist the courts in reaching their decisions. The idea of fairness has allowed the court to depart from a 50/50 split and give more consideration to the nature of inherited wealth.

 The use of prenups should be highly encouraged to protect clients and assist the courts in making the decisions; whilst not guaranteed to be binding, prenups can be highly influential where the court feels they have been fairly and equally entered into. It is also worth advising clients to keep any inherited assets entirely separate from the marital pot- this will not guarantee that they are not distributed on divorce, but it can help to protect them.

You can contact Justine Osmotherley  on 0113 336 3323 or by email at justine.osmotherley@clarionsolicitors.com

[1] [2001] 1 A.C. 596

[2] [2006] UKHL 24

[3] [2007] EWCA Civ 503

[4] [2010] EWCA Civ 1171

[5] [2009] EWHC 3076 (Fam)

[6] [2008] 1 FLR 142

[7] [2009] EWHC 2654 (Fam)

[8] [2010] EWHC 717 (Fam)

[9] [2001] 1 A.C. 596

[10] [2011] EWCA Civ 550

[11] [2001] 1 A.C. 596

[12] [2006] UKHL 24

[13] [2001] 1 A.C. 596

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.