Safeguarding your child’s inheritance in divorce: What high-net-worth parents should know
As parents, particularly in high-net-worth families, the desire to protect the wealth and legacy you’ve worked hard to build is natural. For many, ensuring that financial gifts or an inheritance intended for your children remain within the family is a top priority. However, the threat of losing this inheritance in a divorce can be a real concern, especially when emotions and significant assets are at stake. This article explores how inheritance is treated during divorce and offers strategies to help safeguard your child’s financial future.
How divorce affects inheritance for high-net-worth families
One of the most common questions parents of high-net-worth children ask is: Is my child’s inheritance at risk during a divorce? The answer largely depends on the circumstances of the divorce and how the inheritance has been handled. Under UK law, inheritance is generally treated as a non-matrimonial asset, which means it may not automatically be included in divorce settlements. However, there are exceptions.
If the inheritance has been “mingled” with joint marital assets — such as being used to buy a shared home or placed in a joint account — courts may consider it part of the matrimonial pot. In high-net-worth divorces, where significant assets are at play, courts might take a broader view, especially when deciding how to meet both parties’ needs post-divorce.
Legal strategies to protect family wealth in divorce
When it comes to protecting an inheritance, particularly in high-net-worth scenarios, a few legal strategies can help ensure that family wealth remains protected:
- Prenuptial and postnuptial agreements
For high-net-worth families, a prenuptial agreement is often the first line of defense. While these agreements are not strictly binding under UK law, they carry significant weight in court, especially if they are fair and have been properly drafted. Postnuptial agreements—which are similar but created after marriage—can also be used to ensure that any inheritance or gifts given to your child are protected in the event of divorce.By specifying that inheritance is to remain separate from marital assets, these agreements offer a solid layer of protection. It’s important to ensure that any such agreements are tailored to the complexity of the family’s financial situation and that both parties have received independent legal advice. For more information on how prenuptial agreements can safeguard high-net-worth estates, refer to this guide to prenuptial agreements in the UK. - Avoid mingling assets
In high-net-worth families, it’s crucial to ensure that inheritance remains distinct from marital assets. This can be done by keeping the inherited funds or property in a separate account, rather than pooling them into a joint account or using them to purchase joint assets. By maintaining a clear division, it’s more likely that a court will view the inheritance as a non-matrimonial asset. The UK Government’s guide to matrimonial and non-matrimonial property offers additional clarification. - Trusts and declarations of trust
Creating a trust is another effective way to protect family wealth. For high-net-worth individuals, discretionary trusts can be particularly useful as they give the trustee the authority to decide how and when assets are distributed. This means that inheritance can be safeguarded, and only distributed to your child under specific conditions.A declaration of trust is another valuable tool that can be used to formally record how much of an inheritance has gone towards a particular asset, such as property. This declaration helps protect your child’s contribution in the event of a divorce, ensuring that the court sees it as their own personal asset.
Timing of the inheritance and its impact on divorce
Another factor the courts consider is the timing of the inheritance. If a couple receives the inheritance during the marriage and it has already been spent on joint assets or household expenses, it becomes harder to recover those funds. This can be a significant issue in high-net-worth cases where large sums are involved.
Conversely, if the inheritance is received after divorce proceedings have begun, it may not be counted as a matrimonial asset, though it can be seen as a financial resource that could influence the outcome of the settlement.
In the case of Alireza v Radwan and Others, the court held that future inheritance cannot be treated as an asset unless there is a high degree of certainty. This could be a relevant point for high-net-worth individuals whose estate plans include large inheritances that are not immediately accessible.
Future inheritance in divorce settlements
Although current inheritance is usually excluded, the courts may consider potential future inheritance as a financial resource in certain circumstances. In Michael v Michael, the court ruled that if there is a high level of certainty that a party will inherit soon, this could be factored into a divorce settlement. This applies most often when there is a terminal illness or other clear indication that the inheritance is imminent.
For high-net-worth families, particularly where large estates are involved, this creates another layer of complexity. While parents may wish to pass down wealth in stages, it’s important to consider the potential impact of divorce on future distributions.
Conclusion: Taking action to protect family wealth
While divorce can create financial uncertainty, high-net-worth families can take proactive steps to protect their legacy. By using prenuptial or postnuptial agreements, keeping inherited assets separate, and leveraging tools like trusts and declarations of trust, you can significantly reduce the risk of your child’s inheritance being lost in a divorce.
In an ever-evolving legal landscape, consulting with legal professionals who specialise in high-net-worth divorce cases is essential. Taking these precautions ensures that your family’s wealth remains protected and continues to benefit future generations. For personalised insights into protecting inheritance during divorce, contact our specialist team.
By implementing these strategies, you can navigate the challenges of divorce while preserving the wealth and legacy that you’ve worked hard to build.
