Many people want to pass assets on to their children but are aware of the possibility of such assets being lost on a divorce. Some guiding principles have emerged in two recent Court of Appeal decisions concerning inherited wealth on divorce.
In Robson v Robson, the bulk of the husband's total wealth (£22m) consisted of a large estate on which the family home was situated. He had inherited from his father prior to the marriage. The Court found that, during the parties' 21 year marriage, they had used the inherited assets for their joint enjoyment, rather than seeking to preserve them for future generations. On that basis, the Court treated the inherited assets as available for distribution and awarded the wife £7m, thereby necessitating a sale of the estate.
The Court asserted that, 'where property is acquired before the marriage, or when inherited property is acquired during the marriage, it may be said that the spouse to whom it is given should in fairness be allowed to keep it'. However, inherited assets will be used to meet a spouse's needs if there are no other assets available. The standard of living enjoyed by the parties during the marriage, which may be affected by the availability and use of inherited assets, is a relevant consideration when determining the extent of a spouse's needs.
The Court went on to say that, the nature of the inheritance (i.e. its liquidity and importance to the family), the duration of the marriage, and for how long and in what ways the inheritance has been enjoyed by the parties, are all relevant factors when determining whether to include the assets in the matrimonial pot available for distribution.
In K v L, the wife inherited shares in her grandfather's company, which were worth £700,000 at the date of the marriage, and £57m at the date of the hearing, after 21 years of marriage. Other than the family home, worth a 'mere' £225,000, the shares represented the entire wealth of the parties. The parties lived relatively frugally and sought to preserve the inheritance during their marriage. Although neither worked, they lived on a modest annual income generated by the shares of £80,000.
The husband was awarded £5m to meet his needs. Despite the husband's arguments to the contrary, the Court of Appeal held that there were clear grounds for a departure from equality given the wife's exceptional contribution in bringing her inherited wealth to the marriage, and allowing it to be used to support the family without either spouse having to work. The Court clarifi ed that the sharing principle did not apply when the assets were entirely non-matrimonial (i.e. inherited).
Although at different ends of the spectrum in respect of extent of expenditure, in both cases the inherited assets were ringfenced and invaded only insofar as was necessary to meet the needs of the divorcing spouse.
There are steps one may take to protect inherited assets against attack upon divorce, including retaining assets in a family trust. However, as recently shown in Whaley v Whaley, the family courts do not necessarily shy away from including trust funds in the matrimonial pot, regardless of whether the spouse, or indeed the heir, is named as a benefi ciary. Another potential shield is a pre-nuptial agreement.
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