Catherine Hallam, who is head of private client services at Burges Salmon, talks about the perils of unwittingly converting clients' money from "non-marital assets" to "marital assets".

Editor’s note: This publication has regularly carried articles from legal experts on the ever-changing developments relating to marital disputes as they affect high net worth individuals. In this case, Catherine Hallam, who is head of private client services at Burges Salmon, talks about the perils of unwittingly converting clients' money from "non-marital assets" to "marital assets".

As a wealth manager or private banker, you will most likely not give your clients advice about whether they should save income tax and capital gains tax by sharing the ownership of their portfolios with their spouses. But it is still standard financial advice for accountants and advisors to recommend that a high-earning husband should put money into his wife's name to take advantage of unused tax allowances.

Those advisors have clearly not read the increasing body of case law from the divorce courts about "mingling" of assets and the impact that this can have in a financial settlement.

Take a typical client who has had a successful career in the City. Now in his early 50s, he has a good portfolio of assets invested with you, built up mainly from earnings, partly from inheritance. He expects to be a high earner for a few years to come.

He has just married for the second time, and his accountant has suggested he puts a significant part of his portfolio into his new wife's name. He tells you his plan, and you wonder whether that's a sensible thing to do. 

Would it make a difference to the financial settlement if the marriage went wrong? The answer is yes, it could do so, and it is an action he might regret.

Marital and non-marital assets

Marital assets are normally divided equally on divorce. They are assets and pensions which have been built up during a marriage. The law does not distinguish between the efforts of the breadwinner and homemaker, so assets accumulated from one party's business or employment will still be marital assets.

Non-marital assets are assets acquired by family gift or inheritance, or owned by one party prior to the marriage.

Where an equal division of marital assets leaves each party with enough to meet their needs, non-marital assets will often not be divided equally but will be left with the party who owns them. 

What if assets are put into the other spouse's name?

Crucially, non-marital assets may be converted into marital assets (and therefore exposed to an equal division) if they have been put into the other spouse's name, or joint names, or "mingled".   

If one spouse has chosen to put the assets into joint names, or in the other spouse's sole name, this shows an intention to share them and treat them as assets of the marriage. That choice unwittingly converts non-marital into marital assets.

Tax planning is not a defence. The court would take the view that you cannot choose to get the benefit of sharing assets to save tax, only to argue that you did not really mean to share them at all if the marriage went wrong.

Divorce law in England is notoriously unpredictable as it is based on discretionary principles. The court won't preserve the inherited wealth of one party if there is not enough money otherwise to meet needs, so depending on the overall scale of his wealth, your client might have had to give his new wife some capital anyway, if she had no other assets (such as property) of her own.  This is particularly true if the marriage is a long one.

However, even if the marriage is a short one and his wife has other assets of her own, it would be very difficult to run an argument for assets to be treated as "non-marital" and clawed back after the ownership has been shared.

There have been a series of recent court decisions which have firmed up this principle. Importantly, the Law Commission has in the autumn of 2012 suggested legislative change. There is now a real possibility of future legislation which will make the principle of marital/non-marital assets a rule, rather than a guideline.

Mentioning the unmentionable

So, what to do if you find yourself faced with these instructions?

Get the client on his or her own, and mention that there can be non-fiscal consequences in the event of separation. Suggest he takes advice elsewhere on the subject.

What are the alternatives?

Sharing assets built up during a marriage is usually fine, as they are likely to be shared anyway.

Other ways of protecting assets are available. Stay living together rather than marrying. More sophisticated options are to negotiate a “pre-nup” or a “post-nup”; put assets in a corporate structure (though the type of structure matters), or a family limited partnership. But the basic advice is to keep pre-owned or inherited assets in sole names rather than being lured by easy tax wins.