I often speak to concerned parents who worry – quite rightly – that their adult children’s eventual inheritance may be vulnerable to a claim on divorce from a disgruntled spouse. There are certain ways to attempt to protect your child’s inheritance from a claim by their spouse, but in the end the needs of the parties to a divorce will trump all else, including the origin of the funds, in the eyes of a family law court. I attended an excellent webinar on “The impact of divorce and separation on estate planning” this week by family lawyer Neil Denny at Roythornes solicitors, and thought it would be useful to note down a few interesting points that came out of it in relation to protecting your child’s inheritance.
Pre-Nuptial Agreements
First, prevention – if you are the parents of an adult child who is getting married, you could encourage them to consider entering into a pre-nuptial agreement. These can be difficult to negotiate and are far from romantic, but they are particularly indicated if the parties’ resources going into the marriage are widely disparate. Pre-nups should be reviewed regularly, and must always be reviewed on the birth of a child. Having in place a clear, reasonably drafted pre-nup should hopefully mean that there is no further need to protect your child’s inheritance from their spouse, even if things go wrong.
Protecting a Lifetime Gift
Then there is the matter of the ever-popular lifetime gift or ‘soft loan’ from The Bank of Mum and Dad to help a child with a house deposit. If a loan along these lines wasn’t documented as such at the time it was made, a family law court court is likely to split the money between the parties on divorce. As a consequence, parents should take independent legal advice before making any such gift or loan. It’s still good practice to put in place a formal agreement even if your adult child is currently single, otherwise in time they may become vulnerable to the argument that their pre-marital asset has since become a matrimonial asset.
Protecting your Child’s Inheritance
In divorce negotiations, it is common for one party or the other to point out that their spouse is due to inherit some money, usually from their parents, and as such their future financial needs will be reduced considerably. However, this will not wash – the courts take the view that without a terminal diagnosis, the likelihood of an inheritance at some point in the future is not good enough. Wills can be changed and the court’s job is to provide certainty about the parties’ future resources, including likely timings.
Family courts are sympathetic to the origin of funds, and so if one of the parties in a divorce has received an inheritance during the course of their marriage, the court will try to take that into account. However, if an adult has received an inheritance and then subsequently used that money to provide a family home, there’s a strong presumption that they have contributed those resources towards the family’s standard of living and the funds are then much more vulnerable to claims on divorce.
Timings are also relevant – if an inheritance took place many years ago and has since been dipped into regularly, it’s much more likely to be treated as a matrimonial asset than an inheritance taking place only in the year or two before a divorce. If the inheritance is more recent, there’s a much stronger argument for the judge to leave it out of account.
The length of the marriage and the ages of the parties are important too. In a short marriage (viewed as one lasting 1-3 years) , when creating a divorce settlement the court’s aim is to put the parties back into the financial position in which they entered the marriage, insofar as possible, including any inheritance.
“You were working as a waitress in a cocktail bar, when I met you….”
The Human League
Needs Trump All
Although the factors mentioned above will be taken into consideration, the parties’ respective needs trump everything else from a family court’s perspective. If the court takes the view that one spouse needs a certain amount and those funds are not available elsewhere then the court may well decide to divide up an inheritance. As a result, it’s important to exercise caution in relation to lifetime gifts to adult children, which are otherwise an excellent inheritance tax planning technique. Generous parents must choose between the devil and the deep blue sea, although of course death is a certainty and divorce only a possibility.
Chiltern Wills is a boutique Will writing business based in Beaconsfield and run by former London solicitor, Rebecca D’Arcy. Call us on 01494 708688 or email info@chilternwills.com for a free initial discussion about how we can help you with Wills, Powers of Attorney or Probate.
