How Can Divorce Affect Inheritance Assets?

How Can Divorce Affect Inheritance Assets?

How Can Divorce Affect Inheritance Assets? 900 675 Alfred Ip
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Can my spouse claim the assets I inherited from my parents?

One of the most common questions that we get asked as Private Client and Family lawyers is the following: My parents have passed away and they have left me an inheritance. I am going through a divorce. Can my spouse claim in respect of my share of my parents’ estate(s)?

The general rule of thumb, when it comes to divorce, is that everything owned or controlled by the parties is to be considered as part of the matrimonial pool. However, there is a difference between assets and property which have been accumulated by the parties during the marriage through their own endeavours and assets which have been inherited.

The concept of prospective assets

The Court usually assess the financial resources, needs, obligations and responsibilities at the time of divorce taking into account prospective assets which the couple would acquire in the foreseeable future. Prospective assets include retirement funds, severance payments or other entitlement that a party may receive upon occurrence of a certain event, such as bonuses or end of service payment. Inheritances that a party may receive is one of the prospective assets that the court will take into account.

For example, you are going through a divorce and you are the only child of your parents and both of them are already very old, it is possible that your soon-to-be-divorced spouse may seek to confirm whether your parents have made Wills and whether you are named as a beneficiary. In the event that your parents did not make a Will, you would be a beneficiary under the intestacy rules. In either case, your divorcing spouse could seek to include the assets which you can expect to inherit as part of the matrimonial assets in his/her claim. The Court will need to consider whether or not to make a payment order, or whether to adjourn the application for further payment.

Hence, when one of the spouses has a reasonable chance of receiving substantial assets, it may impact on the amount to be paid to the other spouse. Current and future liabilities would also need to be part of such consideration.

Specific issues related to inheritances

Whether inheritances would form part of the matrimonial assets pool is very fact-sensitive: it depends in each case on the size of the inheritance, when it was or will be received, how it was dealt with during the course of the marriage, and upon the financial resources and needs of both parties during and after the marriage. There’s a variety of scenarios and there are general rules that may apply.

If inherited assets are transferred to joint names or used for the benefit of the spouses, or have always been used to support the family financially, they will likely to be considered to be part of the matrimonial assets available for division by the Court. For lumpsums or property received shortly before the breakdown of the marriage this is less likely to happen. Although it depends on the capability of meeting the future needs of the family and each spouse, in particular when children and their needs are involved. In summary, the key to retaining inheritances is to keep them separate if possible from the assets of the beneficiary and his/her spouse.

While it is harder to argue that future inheritances should form part of the matrimonial pool, it may be argued that the receipt of such inheritance enables a party to provide more for another party financially. For example, if a husband cannot provide the alimony that his wife used to receive in the course of the marriage because his income is now split to provide for two households i.e. the wife’s and his own, the husband’s receipt of inheritance would allow him to do so. The Court has also the power to vary or discharge certain orders in accordance with the change of circumstances of the parties. In other words, even if the husband is ordered to pay a certain amount of alimony to the wife at divorce, the wife can apply to vary such order for a higher amount in the future if she is aware that the husband has received an inheritance from his parent(s).

How can you protect your inheritance and other pre-marital assets?

Assets acquired through family wealth can be protected as non-matrimonial assets with proper estate planning or spousal agreement.

Pre and postnuptial agreements can be made to protect both spouses in the event of a marriage breakdown. These agreements usually govern financial arrangements, such as management of family finances, segregation of assets, spousal support and alimony payments, maintenance for children, calculation of assets within the matrimonial pot, etc. Inheritances that would be, or have been, received by the parties can be specifically excluded from the matrimonial assets through these types of agreements.

However, it is important to bear in mind that these agreements are of persuasive value only. Contrary to commercial agreements, the Court is not bound by such pre or post-nuptial agreements and has full discretion to make an order which deviates from such agreement, having considered the parties’ situation at the time of divorce. One of the main elements a judge will look into when considering the terms of a pre-nuptial agreement is whether such agreement is fair – given the specific circumstances of the case and the family needs – and does not contravene any public policy. In other words, pre or post-nuptial agreements are not water-tight in term of assets protection from the inheritance point of view.

For expat couples or individuals that might move abroad for professional or personal reasons, a pre-nuptial agreement might need to consider an eventual future place of residence so that such agreement signed in Hong Kong can be followed, enforced or at least taken into consideration by a court in another jurisdiction.

A bespoke family trust would likely offer better protection in relation to inheritances. A family trust set up by the patriarch/matriarch of the family with discretionary power to the trustee to manage the family wealth with limited – if not zero – powers to the beneficiaries in relation to the management of the trust offer good protection, as the beneficiary can only benefit from it without inheriting it. In this situation the inheritance never constitutes part of the assets of the married beneficiary and accordingly can be said not to form part of his/her own matrimonial pool. For the above reason, estate planning often involves family members, across generations, working together to put in place the desired asset protection.

Our team at Hugill & Ip has extensive experience in dealing with Family Law and Estate Planning issues – so kindly get in touch with us to find out how we can help.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Alfred Ip

Alfred assists high net-worth individuals (HNWIs) in handling their wealth-related issues, such as contentious and non-contentious trust and probate, mental capacity, family office, amongst other wealth management matters. He is also a leading Dispute Resolution lawyer with over 20 years of experience in Hong Kong. Moreover, Alfred helps clients with issues regarding Family Law.

All articles by : Alfred Ip
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