There’s plenty of change when it comes to splitting the money in a divorce, says Tanya Roberts of Charles Russell
AS AMERICAN AUTHOR Rita Mae Brown once said: divorce is the one human tragedy that reduces everything to cash. Whether the parties are able to settle matters amicably or the court imposes an order at a final hearing, the division of matrimonial assets can be a complex and difficult process.
Indeed, divorce can be both financially and emotionally crippling to the couple involved. One reason for this is that there is not a one-size-fits-all policy for the division of marital wealth. Instead, the courts have a great deal of discretion to redistribute assets and income, regardless of the party they originated from.
In most cases, one party will earns less, or may not work at all and in such cases they will probably be reliant on maintenance from the other party going forward. The parties may have been married for many years, children may be involved, or the parties may be older and have limited earning capacities – in these cases, maintenance will need to last for the remainder of the recipient’s life.
Where do the lawyers begin and how do the courts calculate the appropriate level of maintenance? The courts no longer limit maintenance to the recipient’s needs alone, and although a consideration will be given to them, the courts will also consider the contribution the recipient party has made to the other parties’ income (through domestic support, for instance) and whether one party (generally the wife) has sacrificed their career to raise children.
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In most cases, the recipient of maintenance will be reliant on it to meet their regular outgoings. This means that it is essential that the continued payment of maintenance in the event that the paying party dies is secured. There are several ways of ensuring that continued payment takes place. The paying party can formally undertake to change their will, so that a portion of their estate on death is left to the recipient and/or the children.
However, if at some point they subsequently change their will in breach of the order, it may not become apparent they have done this before they die, which will inevitably lead to litigation upon their death.
In the absence of sufficient financial provision being made in a will, the recipient may be able to make a claim against the deceased’s estate under The Inheritance (Provision for Family and Dependents) Act 1975. Under this Act, certain classes of people (which include former husbands or wives, provided they have not remarried) are able to make a claim against the estate of the deceased if they were financially dependent on them at the time of death. The deceased must have been domiciled in England or Wales at the date of death.
A successful application will also require the deceased’s estate to have sufficient capital to release ongoing financial commitments. However, if the remaining maintenance term is for many years, this may not always be the case. Where it is not possible to settle at an early stage, the courts will have to become involved and this can be costly and time consuming.
LIFE INSURANCE IS generally the most secure way to ensure that sufficient funds exist to discharge maintenance obligations after the payer’s death. Although the courts cannot actually order that one party insure their life to meet their ongoing financial obligations, the parties can formally agree in a court order that a policy will be taken out.
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When deciding the level of life insurance required, solicitors commonly refer to actuarial tables, which show the amount of capital required to produce an income at the agreed level for the rest of the recipient’s life. This may include sufficient funds to meet school fees, as well as spousal and child maintenance. The tables are based on assumptions about interest rates and life expectancy. The income received is also calculated on the basis of capital draw down, as well as interest, so that on the recipient’s death, none of the lump sum remains.
Figures are calculated by use of the Duxbury tables, which illustrate how much is required to capitalise maintenance for the rest of the recipient’s life. For example, to provide the other party with an annual income of £50,000 a year from the age of 51 onwards, requires a lump sum of £1,017,000 on a Duxbury basis.
When it comes to paying the policy premium, either party can take this on. In fact the recipient may actually prefer to pay it themselves if they are worried about their former spouse keeping up payments. The paying party may have to agree to undertake a medical examination and to produce regular updates on the status of the policy to the recipient party.
In the event that the paying party dies and the insurance policy pays out, the recipient will receive, in some cases, a significant lump sum and will need advice on how best to invest these funds. If the figure has been calculated on a Duxbury basis, they will need advice on how best to invest the funds and what portion of their income, if any, should be capital draw down.
Discussions over the distribution of marital wealth and whether one party should support the other far into the future are bound to be fraught with strong emotion. In the midst of this stressful time, people are require to make important decisions which will have a large impact on their future financial security. Good legal representation is essential to ensure matters are handled properly and no important areas are left uncovered.. An important part of negotiations will always be the provision of adequate security for maintenance.
Tanya Roberts is a partner in the family office at Charles Russell LLP
