Treatment of inheritance in divorce

In a divorce, when it comes to sharing assets and liabilities between spouses, the first step on the road to a financial separation is to establish the property, pensions and income of each party, whether held jointly or individually.

This is known as ‘disclosure’; separated spouses have a legal duty to make full and frank disclosure to each other throughout the process. Everything should be disclosed, including inherited assets, even those which are not yet received but anticipated.

The next step is to determine whether an asset is matrimonial or non-matrimonial – i.e., assets typically acquired during the marriage as opposed to those acquired before and not used for the benefit of the family. Non-matrimonial assets can be excluded from immediate division, although their treatment depends on the circumstances of the case.

Inheritance is typically recognised as non-matrimonial, but care should be taken when dealing with inherited assets; the treatment of inherited assets is not straightforward.

Distinctions have been drawn between different types of inherited property. For example, money received from a relative in a will during the course of a marriage might be treated in a different way from a landed estate that has been within one spouse’s family for generations.

If the inherited asset has been intermingled with matrimonial assets it is more likely to have passed into the ‘matrimonial’ category and so be less capable of exclusion from the assets available for sharing on divorce. Such an example of this would be where cash inherited during a marriage is used to pay off part of the mortgage on the jointly-owned family home.

The use of inheritance for the family’s benefit can transform it from ‘non-matrimonial’ to matrimonial. Therefore, if the desire is to protect the inheritance from being shared, it is always advisable to keep inherited assets completely separate from matrimonial assets and not put into joint names or used for the benefit of the family.

Each case will turn on its own facts, with the dial of the compass pointed always towards fairness.

There are three key events where consideration of the treatment of inheritance in divorce is relevant:

1. In anticipation of a marriage taking place. Prenuptial agreements are not legally binding just yet, but as long as they are correctly prepared, they are persuasive and important in the event of a permanent breakdown of the marriage. A court needs to have a good reason to depart from a nuptial agreement. They are becoming the norm, and no longer exclusively used by the high-net-worth individuals. These agreements can set out the parties’ intentions about how assets should be treated if there is a divorce, including inherited assets.
2. When making a will and leaving assets to younger generations – where there is a wish to protect a legacy from a future divorce by placing it into trusts that can give the asset a better chance of being ring-fenced from a financial remedy claim. Similarly, when leaving inheritance to a younger family member who is in, or is contemplating starting, a cohabiting relationship, encouraging them to have a ‘cohabitation agreement’ or declaration of trust where there is a risk of intermingling property can protect inheritance.
3. When there is a permanent breakdown of a marriage leading to a divorce – establishing early on whether there are inherited assets, the type of inherited asset and how it should be treated is crucial to enabling effective discussions about a financial settlement. This can lead to a swift and fair agreement whilst avoiding lengthy and expensive court disputes.

In summary, keeping finances separate, maintaining a written record, and establishing legal agreements where possible to do so will help ensure that inherited assets are protected as you intended them to be. Obtaining legal advice from a specialist financial remedy lawyer at an early stage is essential to understanding what to do to protect inherited assets in divorce.