Inherited Assets and Divorce
Since the landmark case of White V White [2000] UKHL 54, there has been an on-going debate about how the family courts should treat inherited assets upon divorce. Treatment of inherited assets by the courts is far from predictable and is often reflective of the opinion of Lord Nicholls who stated that 'pre-marital property should be treated differently upon divorce because it represents a contribution made by one party which is unmatched by an equivalent contribution made by another'. There is no rules in relation to what happens to inherited assets in divorce. It is for the Judge to decide ‘how important it is in the particular case'.
It is generally agreed that in a ‘needs case’, where there are limited monies or other assets to meet the needs of both parties, an inherited asset will carry very little weight in proceedings. However the longer a marriage survives, the more likely it is that the inherited assets will be absorbed into what is called the "matrimonial pot" or ‘’family assets’’. The court's attitude towards this can be illustrated in a series of recent medium and big money divorce cases.
The case of N v N (Ancillary Relief) [2010] EWHC 717 (Fam) concerned a 30 year marriage. Charles J thought the value of the inherited asset in question was important when considering the extent to which there should be departure from equality. In this case the wife was awarded approximately 32% of the total assets. Charles J’s reasoning reflected his desire to ensure that such assets be passed on to be enjoyed by the next generation.
In the recent Court of Appeal case of N v F [2011] EWHC 586 Fam, Mr Justice Mostyn gave an explanation of what he believed to be the correct approach for the family courts to take. The case involved a 16 year marriage with marital assets totalling around £9.7m and pre-marital assets totalling around £2.1m. It was recognised that the treatment of inherited assets by the courts was fact specific and discretionary. Mostyn J noted that there were two schools of thought as to how inherited assets should be treated. Firstly, the courts could simply adjust the overall award from 50% accordingly; however a two step approach was more appropriate. The importance of inherited assets upon divorce should be decided based on how intermingled they become during the marriage with other marital property. The court should then go on to decide how much of the pre-marital property should be excluded from the total assets and then divide the remaining matrimonial property fairly based on the yardstick of equality and each party’s needs. In this case the judge excluded £1m (as opposed to £2.1m) of the overall assets and divided the remainder equally. The judge acknowledged that the 44.7% award made to the wife was particularly high due to the impact of her lifestyle needs. Although this is a big money case, meeting each party needs still has an overarching importance as illustrated in the case of K v L [2011] EWCA Civ 550. In this case the wife had a £57.4m share in a family business that she inherited 20 years prior to marriage and which had always been kept separate from marital assets. This made up a very high percentage of the total assets and despite this wealth the couple had lived quite a modest lifestyle. The courts surprisingly went on to award the husband a relatively modest sum of £5m despite their 20 year marriage and the wife’s assets. Wilson LJ held that 'recognising the wife's important and unmatched financial contribution in the present case did not discriminate between parties' and a substantive difference in contribution was rightly reflected in the awards given.
The different attitudes of the courts do inevitably create some uncertainty and unpredictability where these issues arise. The best way for any individual bringing inherited assets into the marriage, where practicable, may be to keep such assets "separate" , so that if the day comes, it can be argued that they have never constituted a real part of the 'matrimonial pot'. Alternatively pre-nuptial and even post-nuptial agreements are being given increasingly more weight. Making a prior agreement detailing what will happen to the inherited assets should divorce occur may be very helpful in assisting the court when it decides how the finances should be divided on divorce.