Protecting Inheritance from the pitfalls of Divorce
There is a growing concern amongst parents about how their child’s inheritance could be affected by a possible divorce in the future. In a survey outlined by the Times one fifth of people were worried about how their money would be divided if any of their married children got divorced. However there are various ways you can help protect your child’s inheritance through effective estate planning.
Marriage brings families together and ultimately legally binds those persons together in, often, complicated financial situations. One would hope never to enter into marriage considering it’s downfall, however, the reality of the position is that approximately 42% of marriages are estimated to end in divorce in England and Wales according to the Office of National Statistics. This means that unfortunately it is probable at least one divorce may arise within you family circle at some point.
The importance of a Will
A survey conducted by unbiased.co.uk in 2011 found that over 60% of adults in the UK do not have a Will in place to express their wishes on how their own estate is distributed. If you do not have a Will in place this leads to your estate passing under the intestacy rules, which ultimately allows the law to decide how your estate is distributed meaning your wishes will not be known or considered. This could result in some of your loved ones not being accommodated under the intestacy rules due to the strict nature of the process, such as step-children.
If you want your wishes to be followed it is vital that you leave a Will detailing exactly who you want to benefit from your estate and in what proportion. The majority of people do have an idea about how they would like their money to be spent and parents especially want a say in how their child’s inheritance is distributed.
This can be done by seeking legal advice, in order to produce a Will outlining how you would like your children, grandchildren, other family members or even friends to benefit from your estate.
Why is it necessary to protect your estate from Divorce?
Even for those people who do have a Will in place, two thirds of adults over 60 years old still have no provisions in their Will to protect their children’s inheritance if they end up facing a divorce. A survey by Investec Wealth and Management also found that one third of parents have real fears that their inheritance could be lost through divorce, with 14% admitting they have little confidence their child’s marriage will last long term.
Therefore, it may be that you are concerned about your child’s choice of partner, your child may have been divorced in the past and it is possible this could happen again or your child may be separated from their spouse and you are unsure whether they will get back together or end up getting a divorce. It may also be that you approve of your child’s partner but you want to make sure your child’s inheritance is used solely for their own benefit. You would not be alone in thinking this way as most parents will have considered this due to the need to want to provide security for their own child rather than their son or daughter-in-law, who in most cases has their own parents to provide for them.
However there are ways to alleviate these concerns to best plan for the worst case scenario and to put some protections in place through effective estate planning.
How is it best to protect your inheritance?
There are several ways in which you can legally protect how your estate is to be derived. All family members will need to take an active role in considering the implications of their relationships when establishing how best to protect inheritance. Families will need to consider how best to protect assets from various stand points. We shall address the ways in which your family can protect wealth below.
Trusts are a useful tool used to help protect your family wealth from any future divorce proceedings, in particular through a discretionary trust outlined in your Will.
What are Discretionary Trusts?
A discretionary trust can be detailed in your Will and it allows you to leave all or part of your estate to be held on trust. When outlining the trust you decide who the trustees are and who the beneficiaries are. The trustees exercise control over what happens to your estate that is left on trust and the beneficiaries are the people who are going to benefit from the funds left in the trust. The trustees can use their discretion to decide which people become beneficiaries and when and how they should receive their inheritance.
By way of example you could leave £500,000 of your estate in a Discretionary Trust for your three children to receive when you pass away. You could then chose two family members, friends or professionals to be trustees and they would then decide when and in what proportion your children would receive their money.
However, you can also give guidelines for the trustees to follow by creating a Letter of Wishes alongside your Will in which you can outline how, when and in what proportion you would like your beneficiaries to receive their inheritance. Although Letters of Wishes are not binding documents they will be considered by your trustees when they are distributing the trust.
How they can help?
Discretionary trusts are a useful way of protecting inheritance from numerous factors, such as, concerns over your child not being able to manage their own affairs, if they are in a relationship where someone may exercise control over their inheritance if it was received outright or if your child is likely to get a divorce in the future.
Under a discretionary trust no beneficiary has an automatic right to the funds in the trust as the trustees have the power to distribute the money accordingly. This makes a discretionary trust a useful device to protect family wealth from divorce because if one of your children is a beneficiary in the trust and is facing divorce proceedings the trustee’s may decide to withhold distributing your estate to this child until after the proceedings.
Discretionary trusts are not only a useful tool in protecting wealth from divorce, they also have the added benefit of being outside of the beneficiary’s own estate for Inheritance Tax purposes and they can be an efficient way of managing the tax consequences of your estate. It is therefore necessary to seek independent legal advice to assist in minimising the tax consequences of your estate.
How are Discretionary Trusts perceived in divorce proceedings?
However, although discretionary trusts are a useful form of protection the court, in divorce proceedings, can still take into account a parties interest under a trust.
The court has the power to vary nuptial settlements, which are trusts created during the marriage. However, in the case of Joy v Joy Morancho, it was found that if a trust is established before your child marries it will be considered non-nuptial and will only be looked at if the parties needs cannot be met out of the marital assets.
The court, in divorce proceedings, will also look into whether the trust is genuine or a “sham” trust intended to prevent one spouse from claiming an entitlement to the assets. However, discretionary trusts set up in a Will, as detailed previously, will have been set up for a genuine reason such as to manage tax or to protect wealth for future generations and so will usually be considered genuine by the court.
Thus, although an interest in a trust will be taken into account in divorce proceedings it is better protected if it is non-nuptial, if the funds have been kept separate from matrimonial finances and if the needs of both parties to the divorce can be met by dividing other assets alone. Furthermore, the use of a trust offers a lot more protection than an outright gift left in your Will.
Considering gifts made in your lifetime
Although it is necessary to consider how to protect your child’s inheritance in your Will, it is also worth considering how to protect any gifts you make to your child during your lifetime. If your child is married or is likely to get married in the future and you give them a significant amount of money to assist them in either buying a house or investing in their future, this gift can be vulnerable in divorce proceedings. For example, If your child faces a divorce there could be arguments made by their ex-partner that this gift was used for the matrimonial home and was intended for both parties and so the funds should be shared. However, this will likely raise concerns with those parents who intended this lifetime gift to be used solely for their own child’s benefit.
Therefore, it is essential to outline your exact intentions when making a gift to your child stating that it is to be used for a certain purpose and it is for them only. This can be done in writing by way of a letter or an email and this will then be considered by the court in divorce proceedings as to what and who the gift was intended for. This will assist in ensuring your wishes are followed in that this amount of money is used for your own child rather than their ex-partner.
2. Nuptial Agreements
Pre-nuptial agreements are another useful tool utilised by the Family lawyer when considering protection of assets. Not only are they useful for those whom have already benefitted from family wealth and inheritance, but also for those parties who may expect to receive either interest in family businesses or assets in other forms.
Post-nuptial agreements may be a useful application if your children are already married and at that stage there is no clear agreement for how your legacy could be divided upon separation or divorce.
What are Pre-Nuptial Agreements?
Pre-Nuptial agreements are usually prepared prior to parties engaging in marriage. They aim to consider how a party’s assets should be owned and divided in the event of a divorce or separation. The agreement would seek to plan for how income and future earnings, assets and liabilities should be dealt with, within the term of the relationship. In order to be a useful exercise to protect your legacy, the document should also deal with the any interest under a trust.
Usually, the agreement will address which party owns or will own certain assets on a future breakdown of the marriage and therefore we can establish what is to be "matrimonial property" (joint property) and "non-matrimonial property" (individual property).
Joint property usually includes assets/liabilities acquired during the marriage and assets held in joint names, such as the family home and joint bank accounts. Separate property usually includes any assets parties owned before they married, inherited assets before marriage (or received as a beneficiary of a trust) and gifts received by one party during or prior to the marriage.
Nuptial agreements sometimes deal with financial provision for existing children, but do not usually attempt to deal with financial provision for any future children. Significant changes in circumstances during the marriage, including the birth of children, are usually dealt with by review of the terms of the agreement; often a review clause is inserted into the nuptial agreement setting out when a review of the agreement should take place.
What are Post-Nuptial Agreements?
A post-nuptial agreement is a legal agreement made between individuals who are already married. The agreement usually sets out how the couple wish their assets to be divided between them if they later separate or divorce. Some agreements also address how the couple currently arrange their finances and how this will continue or change during the marriage.
Post-Nuptial agreements are a form of trust that benefits one or both parties to a marriage and is made because of, the marriage. The court can vary a post-nuptial settlement in some circumstances to make financial provision for the parties to the marriage or their children. These documents are often complicated and technical and requires specialist advice as they will dictate how parties continue to handle their daily finances furthermore.
How can Nuptial Agreements help?
Practitioners are increasingly finding that Pre-Nuptial Agreements are on the rise. One main benefit to parties considering the use of an agreement is that it provides clarity and certainty to both: the parents considering leaving a legacy to their child entering into a new relationship; and also to the child in the knowledge that their inheritance is clearly marked to be their separate property.
Family businesses can also be considered within the making of an agreement. Any family business is at risk of a breakdown within a divorce if the interests are not well established and protected. In a recent survey conducted by PWC of all Irish family businesses, 82% confirms that they have no succession plan and approximately half of all businesses confirm that they were planning a change in the ownership of the company due to concerns in relation to family breakdowns. Businesses operating in the EU will need to consider their constitution and potential family disputes in light of Brexit changes.
The main aim of a nuptial agreement is to clarify how the parties will arrange their financial affairs during the marriage, enabling the couple to have transparency at the start of the marriage. The financially weaker party may also feel more secure knowing the extent of their combined finances.
Nuptial agreement should provide certainty for couples who wish to formally stipulate how their assets should be divided if they eventually separate or divorce, including inherited wealth or any assets within a trust.
How are Nuptial Agreements perceived in divorce proceedings?
The first main point for anyone entering into a Nuptial agreements is that they are not binding. It might therefore seem a completely wasteful task to consider one – but hope is not all lost. Although an agreement may not be binding, it is a persuasive document. Critics suggest that nuptial agreements are an imperfect solution but there are sufficient safeguards in place to ensure they are considered.
Divorce proceedings are lengthy, expensive and emotionally draining upon anyone embroiled in the ordeal. Nuptial agreements seek to take out the uncertainty by establishing a keen set of ground rules for the distribution of assets when looked upon within financial remedy proceedings.
The Court has an ultimate discretion in financial matters once in family proceedings, however, the Court must give appropriate weight to a nuptial agreement as a relevant circumstance of the case when considering the case as a whole.
In the case of Radmacher v Granatino  UKSC 42, the Supreme Court considered the weight that should be attached to a nuptial agreement by a court when exercising its broad discretion. The Supreme Court held:
"The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to the agreement."
The Court will consider 3 principles of fairness, needs of both parties [taking into account the ages, earning capacity and standard of living] and compensation if one party’s situation is unequally weighted and sharing for parity.
When preparing any nuptial agreement, it is important to seek the advice of a legal professional to ensure that the agreement is fair, reasonable and necessary to meet the needs of each party upon a separation and during the relationship. If one party seeks to control the distribution of assets in their favour at the outset without cause for consideration as to any later compensation, then it is very likely that the Court will assess the agreement as being unfair and rule out the agreement.
However, as always, there are caveats. Courts are told by the Supreme Court in Radmacher that they are not to be paternalistic and patronising and that the parties own adult autonomy should be respected. The court is an available resource to implement an agreement if both parties continue to be bound by it and therefore they should not intervene.
Particularly, in the case of parties wishing to protect assets received by way of inheritance, the court commented that it is not inherently unfair if parties to an agreement seek to ring-fence non-matrimonial property, including assets owned before the marriage and assets a party anticipates receiving from a third party during the marriage, through lifetime gift or inheritance. The Court will not seek to intervene and divert from equality if the parties voluntarily entered into the agreement at the time understanding the likely outcome.
Ultimately, the responsibility of obtaining a nuptial agreement falls to the child in this situation. The parent wishing to leave a legacy to a child cannot force them to seek to protect the assets received under inheritance.
Protecting your Grandchildren’s inheritance
Amongst parents concerns about their child’s inheritance, there is also a need to want to protect any inheritance their grandchildren may receive. Some people decide to “skip a generation” which would mean disinheriting any married children in favour of their grandchildren. This is one way of trying to protect legacies from divorce but it can be ineffective as it would mean your own child would not benefit from the estate at all.
Pecuniary legacies outlined in your Will are an effective way of ensuring your grandchildren receive a portion of the funds from your estate. Pecuniary legacies are cash gifts that can be given to your grandchildren from the funds in your estate. For example you could give each grandchild £5,000 for them to receive when they reach the age of 18, 21 or 25. If your grandchild is over this age when you pass away they will receive their money outright, if not it can be held by their parents until they reach such age that they can reasonably spend their inheritance. There are other methods that can be used in order to ensure your estate passes to your grandchildren and these can all be discussed with our experienced associates at Lupton Fawcett.
The reality of the law is that there are ways to ensure that family assets and business interests stay within the family as intended. However, practically it is always best to ensure your assets are protected by the parent and the child. Parents need to take the responsibility of securing their position by preparing a Will and necessary discretionary trusts should be utilised. The child must also take action if they wish to ensure that their parents views are to be upheld, by preparing a nuptial agreement, whether pre or post the wedding.
Contemplating your demise and future family difficulties can be a hard pill to swallow, at Lupton Fawcett we aim to help you make your decisions in a family focused and protective way.
For further advice or help with any of the issues raised in this article, please contact: Sophie Arrowsmith from our Family Law team in Leeds; Richard Buckley, from our Family Law team in Sheffield or Megan King from our Private client department on 0113 280 2192, or alternatively email her at email@example.com.
(Around half of these divorces are expected to occur in the first 10 years of marriage.)
 Joy v Joy-Morancho  EWHC 2507 (Fam)
 Section 24(1)(c), Matrimonial Causes Act 1973
 For more information as to the results of the survey see: https://www.thetimes.co.uk/article/family-firms-at-risk-from-failure-to-plan-for-succession-tm8nptf2s
 The Supreme Court relied upon the cases of White v White  UKHL 54 and Miller v Miller; McFarlane v McFarlane  UKHL 24 when preparing their Judgment of key factors to consider. In particular, the Court notioned that the important factors were that the agreement was fair, considered compensation sufficiently and that the parties should consider sharing.
 The Court must give adequate consideration to all of the factors within Section 25 of the Matrimonial Cases Act 1973.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.