Risk of Divorce Affects Inheritance
A study has shown a growing reluctance for parents to gift money to their children because of anxiety about it being lost on divorce.
Financial planning firm Investec Investment & Wealth surveyed over 1,000 people about their plans either for their children’s inheritance or to provide other financial assistance. 30% of those surveyed were unwilling to make financial gifts to their sons or daughters because they were concerned that their child’s subsequent divorce could see the money lost to the divorcing spouse.
With divorce remaining widespread, this is a legitimate concern, but family lawyers are able to offer these parents significant reassurance as there are a number of protections available.
It is indeed the case that all assets belonging to either spouse must be considered on divorce, at least initially. However, it is now an established principle that funds brought into a marriage, either because they were owned before the relationship or because they came from an inheritance, are known as “non matrimonial property”. A distinction is drawn when it comes to dividing non matrimonial property up on divorce when compared to money or property that has been built up during the marriage through either or both spouse’s work. There is no expectation that one spouse will share the other’s non matrimonial property on divorce unless it is necessary to meet their needs. The introduction of additional property like this, when the other spouse does not make a similar contribution, is a primary reason why assets will not be divided equally, unlike in many cases.
So the legal position already assists parents who are concerned about giving to the next generation. However, the existing authorities can be reinforced by a well-drafted pre nuptial agreement, which is a sensible precaution where there are likely to be inheritances of significance. Broadly speaking, for a pre nuptial agreement to be upheld in a later divorce it must result in a fair financial outcome. However, there is nothing innately unfair about keeping inherited assets separate after divorce and this may be particularly desirable in the event of a short marriage where there are no children, a circumstance pre nuptial agreements are particularly well suited to. Parents can play a key role in encouraging their offspring to consider a pre nuptial agreement when having general discussions about financial planning and could even consider this a condition of gift-giving, if this provided peace of mind all round.
Other possible protective steps include making loans to children rather than making gifts outright. Properly documented and adhered to, loans can be an excellent tool for helping children get on the property ladder, for example, but without the risk the funds will be lost or used for a different purpose. Another alternative, which can prove more tax efficient than a loan structure, is the setting up of a trust, of which the child is a discretionary beneficiary. Safest of all is to make payments on a child’s behalf, for example for a grandchild’s school fees, so that it never forms part of a married couple’s own assets.
There are therefore a number of alternatives to assist families who wish to share their wealth across the generations, but who remain naturally protective. Clarity and communication with the appropriate involvement of family law and estate planning professionals is key to achieving the right outcome.
The family finance team at TV Edwards LLP comprises specialist, accredited lawyers with many years of experience in helping parents and divorcees find bespoke solutions, including in relation to pre nuptial agreements, gifts, loans and trusts.