July 23, 2013

Wealth protection – Pre-marital and post separation accrual of assets: how is it dealt with?

In popular media, the jurisdiction of England and Wales is frequently touted as being the “divorce capital of the world”. It comes as no surprise that the legal principles which apply are more complex than those reflected in the press. The Family Court Judges carry a considerable degree of discretion when applying the matrimonial law as every case has to be determined with regard to its own factual matrix so that a fair result can be achieved.

The first point of reference is to consider whether an equal division of assets between the spouses would provide a fair result. In many cases, such a division would not create a fair outcome as there are simply not enough resources available to properly meet both parties’ needs (housing, capital and income needs) if the resources were simply split down the middle. The party with primary care for the children (or other dependents) will have greater needs and therefore may be entitled to a larger share of the assets. One party may have a greater earning capacity than the other and therefore be in a better position to rebuild capital or their pension in the future. Their mortgage capacity will, in turn, also be more significant than the other spouse. In these circumstances, it is therefore more likely that a departure from the principle of equality will justifiably be made in favour of the weaker financial party, in order to properly meet the respective needs of both parties to the marriage.

But what about a departure from equality where one party has acquired assets prior to the marriage or since the parties have separated? Do these resources amount to “matrimonial property” to be divided between the spouses? Is it fair to divide these resources equally between spouses?

Matrimonial or non-matrimonial property?

Non-matrimonial property as opposed to matrimonial property may not necessarily be subject to the sharing principle. Examples of “non-matrimonial” property may be gifts or inheritance received by one of the spouses; specific property such as farms; businesses owned or run by one of the spouses and in particular inherited family businesses; family heirlooms (artwork, antiques); literary executorships; property whereby there has been specific provision for it within a pre or post-nuptial agreement (provided of course that the agreement is deemed to be fair and freely entered into with an understanding as to its implications).

It is also necessary to look at whether these assets have been preserved or realised. If the latter, how were those assets realised and were the proceeds used within the marriage in any way? If the assets have been used within the marriage or alternatively, if the assets (or substituted assets) have been intermingled with assets used or generated within the marriage, then this property is likely to be considered to be matrimonial property. In addition, the extent to which the other spouse and/or family has benefited from the assets and the duration of their benefit is also relevant when looking at the intermingling of matrimonial and non-matrimonial assets.

The intention of the parties must also be considered – what were their respective intentions when this property was acquired and why did they choose to hold property in a certain way? Has the other spouse had involvement in managing, improving or preserving what is supposedly “non-matrimonial” property? If they have, it is more likely to be regarded as matrimonial property. Have any other agreements or trusts been drawn up by the donors as to how they had intended the property to be held when they gifted it to one of the spouses?

If looking at a business, was it set up prior to the marriage or post separation? Did its profitability come about solely as a result of one party’s endeavours?

All of these questions should be considered when determining whether property is “matrimonial” or “non-matrimonial”. Once this has been clarified, this leads us to consider how it is to be treated. There have been two differing approaches applied by the courts when determining how property should be distributed. It is necessary to have an understanding of both approaches as the overall outcome could be significantly different depending on which approach has been applied.

1. Formulaic/mathematical approach

Identify and quantify the “non-matrimonial” property and its value. When determining the value of the “non-matrimonial” property, inflation may also have to be taken into account e.g. from date of accrual of the asset to date of the marriage plus “passive growth” in value of the asset. Once the value of the asset is ascertained, it is then excluded from the matrimonial pot, leaving only the “matrimonial” property to be split equally between the parties.

2. Broadbrush/overall fairness approach

The mathematical approach appears logical but it has not been used in some cases, with the court instead preferring to look at the overall fairness of any division of assets.

This approach involves considering the overall value of all assets, both matrimonial and non-matrimonial, and then adjusting the award away from a 50% split in order to reflect the fact that there is non-matrimonial property. There has been a suggestion that when applying this approach, there still has to be some regard to the quantification and value of the non-matrimonial property rather than simply seeking to “feel” what would be the fairest division.
Nevertheless, this approach focuses moreover on seeking to achieve the overall “fair” outcome rather than focusing so precisely on mathematical divisions of the assets.

It should still be noted that the equal sharing principle is not necessarily limited to matrimonial property and can still be applied to non-matrimonial property. However, there is more likely to be departure from the equal sharing principle when non-matrimonial property exists (in favour of the party who acquired that property).

Any departure from the equal sharing principle will entirely depend upon the circumstances of the case. It must always be guided first and foremost by each party’s respective needs to ensure that there is proper provision for needs in the first instance.

Post-separation assets

When considering assets which have been acquired post-separation, it is necessary to look carefully at exactly how those assets have been acquired and/or funded. If the asset was acquired or created as a result of assets used or generated within the marriage, it is less likely that it will be considered to be non-matrimonial property. It is important to look at when the business was set up and at what date it become profitable. If the business was set up post-separation and through funding which is independent of the marriage, there is a stronger argument that this will be treated as non-matrimonial property and thus less likely to be subject to the equal sharing principle (assuming of course that there are sufficient resources to meet the parties’ needs from matrimonial property).

What to watch out for?

  1. If you are concerned about ring-fencing property which you wish to try and keep outside any matrimonial pot for division, it is advisable to enter into an agreement with your spouse or future spouse in order to ring-fence those assets. Note that such agreements have to be considered fair and must be freely entered into, with parties understanding the implications of any agreement. The courts still retain ultimate discretion in considering whether to uphold any agreement. It is strongly advised that legal advice be taken when drawing up and entering into any such agreement.
  2. As to other gifts or inheritance, insofar as it is possible, retain documentary evidence as to how the asset (s) are to be held and for whose benefit. Try to ensure that those assets are not intermingled with other assets used/generated within the marriage or used for your spouse’s or the family’s benefit. Consider whether the assets should be placed in a trust or other settlement in order to keep them entirely separate from the matrimonial finances. Again, take legal advice at the time about how the gifted/inherited asset is to be held.
  3. If you are concerned about protecting assets acquired post-separation, ensure that you retain all documentation as to the accrual and/or funding of the asset to prove that the asset/property has been acquired completely independently of the marriage. Try and avoid using any assets that were used within marriage when setting up a new business, purchasing or acquiring a new asset.

This article is provided for general information purposes only and should not be applied to specific circumstances without prior consultation with us.

For further details on any finances in divorce issues covered in this update please contact Alexandra Wilks in the Family department on 020 7583 2222 or [email protected]

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