It is not uncommon for one party in a relationship to have extended family who are much wealthier than the couples themselves. But what is the situation if they separate? Where the wealth is concentrated on the side of one spouse, does it become relevant when it comes to looking at dividing the couple’s matrimonial assets? We look at the circumstances in which this might happen.
What are the reasons extended family finances might be considered during divorce?
Essentially, any family wealth which is not in your hands does not fall into the matrimonial pot. However, there are several ways in which someone’s wider family finances may be considered during a divorce. This includes:
- Where the extended family has provided regular financial support to the couple, by way of monthly income or regular substantial cash gifts. For a payment to be considered a gift, there must be evidence it was given with “no strings attached” and no expectation of the advance being repaid in the future. If a court decides that a payment from a family member was a gift, then it will treat it as part of the overall assets which are available to share between the divorcing couple. Even if a gift is successfully argued as a contribution made for the benefit of one party only, that is rarely the end of the matter. Ultimately, the court must reach a financial settlement which meets the reasonable financial needs of both parties. This often requires the relevance of financial contributions to be limited, or disregarded completely.
- Where help from wider family was available when needed in the past, such as buying or improving a property. Payments which are not gifts are likely to be treated by the court as loans, which are sub-categorised as either “hard” or “soft”. The distinction comes down to the likelihood of repayment being enforced, so if there is little or no prospect of enforcement, the loan will be treated as soft. On the other hand, if there is an obligation to repay, and it is reasonable to expect it will be enforced, it will fall into the hard category.
As a general rule of thumb, the court views soft loans as unlikely to be repaid in the future and so it is not obliged to take it into account when deciding on the financial settlement. Because hard loans must be repaid, they will be considered when deciding the outcome.
- The expectation or promise of substantial capital in the future, by way of inheritance, for example
The general starting point for the court is that parents or wider family members are entitled to make their own decisions regarding how to gift their money and the court cannot legally required them to make such payments. Unless the family member is making it clear that any regular financial support will continue, or that they are offering to help one of the parties in the divorce, for example, by getting them back on the property ladder, the court will presume they will not be offering ongoing financial support.
There is a difference between the wider family coming forward to support, which a court can take into consideration, and the family making no such promise or even stating they will not assist, which it cannot take into account.
What is the court’s position regarding future inheritance?
Because of the lack of automatic rights of inheritance under the law, the court will not take into account provision under a will from someone who has not yet died. Although there may be limited circumstances where the court accepts that money is to come to one spouse, there is the question of timing, and whether the funds will reduce, through care costs, for example. It could be taken into consideration if it is expected that the person making the bequest will die in the near future and the inheritance is likely to be substantial.
In some countries, there is an automatic legal right to inherit and in those cases, the judge may take the view that this future benefit is relevant when dividing the assets.
How does the court make its decision?
When it comes to understanding if you have to share inheritance in a divorce, you need to distinguish between matrimonial and non-matrimonial assets.
- Matrimonial assets typically come into the possession of either party after the marriage has taken place. Examples include pensions, property, or savings. If you have received an inheritance during the marriage and have used this money, or some of it, to pay for various family expenses, such as holidays, or building an extension on the family home, it is likely the court will consider the inheritance to have “mingled” with the matrimonial assets and therefore to be divided as part of the family pot.
- Non-matrimonial assets are those obtained by either party before marrying or following the divorce. Because these assets were not acquired during the marriage, they cannot automatically be claimed during the divorce by the other party. Such assets are generally excluded from the financial settlement. However, if the matrimonial assets cannot satisfy both parties living needs, the court will consider non-matrimonial assets in the settlement.
Will the money be safe in a family trust?
If you benefit from a family trust, the court may consider it to be a resource, particularly if you have consistently received funds from the trust and it is likely this will continue. Where the trust is considered to be a “nuptial settlement”, the court has the power to vary the trust to provide a distribution towards another spouse. A trust will be considered being nuptial in nature, where it has been set up in connection with a marriage or has otherwise been used to benefit you and your spouse during the marriage.
What are the ways to protect family wealth on divorce?
There are a number of proactive steps parties can take to help preserve family wealth. These include:
- Prenuptial/postnuptial agreements are often used to protect family wealth because they regulate the distribution of the relevant funds should the couple divorce
- Loan agreements properly drawn up when money has been advanced will make it far easier to persuade a court that the contribution from one party’s parents must be repaid.
- Trusts can protect funds for future generations and are potentially the most effective mechanism to protect wealth on divorce if set up properly.
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