Ep. 5 - How the court treats finances on divorce

Welcome to the Explaining Family Law podcast with your host Tim Whitney and Jen Curtis of Melznery. Each episode we'll talk about a family law topic and explain the key elements, give some real life examples and try and do some myth busting. This is a podcast aimed at people who are interested in family law, whether experiencing a separation or looking to start a family or indeed people who work with clients in this area, we'll talk about a wide variety of topics from children to pensions mediation to surrogacy. As you'd expect from a podcast from the law firm, we're going to start with a warning. Legal principles in every podcast are correct at the date of publication, but please do not rely on it as legal advice. If you'd like to speak to us about your own legal requirements then please contact one of our expert lawyers. Today we'll be discussing the legal principles which apply when a couple are trying to divide their finances on divorce. These are the principles that a judge would use if they were deciding a case and therefore there are the principles that people and their lawyers would normally take into account when considering settlement options and outcomes. By talking about the different facts that play, we hope that you'll be able to understand some of the terminology that's used and to identify some key areas where advice might be needed. The points we discuss are relevant not only to people going through a divorce, but if you're a professional who is supporting somebody who's going through a divorce or perhaps your friend or family member are going through a divorce. So let's start as we always do with our myth buster. It's just 50/50 isn't it, Jen? I've only it was that straightforward Tim. I think we'd possibly be out of a job. There is no automatic formula of 50/50. The courts have got a lot of different factors to take into account in working towards a settlement which is fair. Now for a lot of people, they may well assume that fair is 50/50, but there are also examples of where fairness requires the court to depart from equality. That's often where someone's needs have to be met. So while 50/50 might be a great starting point, it isn't necessarily the end point. And I think one of the factors that I think is most commonly applied when the court is moving away from 50/50 is where the court is looking to factor in the children. So before we even start looking at what is a fair settlement between the parties, the court is putting first and foremost in its mind the welfare of the children and any settlement that the court is recommending or ordering or any settlement that the parties are agreeing has got to have at its heart the welfare of the children. So let me start by just setting the scene. In England and Wales, there is no standard formula for calculating the financial division on divorce. So there isn't a married couples act that says to a judge, you have to put this number into this formula, that number into that formula, and then that will give you the answer. The system itself is what's known as a very discretionary system and the court are told that they have to consider all the circumstances of the case, which brings with it a large advantage in that they can set out a very personal outcome for a family, but it also can make it quite difficult for people to understand what their outcome is going to be of their case. So you've got a judge that's told there's no formula and you've got a wide discretion, you need to look at all the circumstances in the case. There's a bit more guidance than that in that within the main legislation, the main law that judges look at, which is the match from in your causes act from 1973, they set out a number of factors that the court should think about when looking to achieve a fair outcome. And these are known as the section 25 factors. You can google these, so we're not going to run through them all, but they will include things like the standard of living of the party during the marriage, the ages of the couple, the length of the marriage, any disabilities, but it also as a key point includes what the assets and the resources are both from the points of view of the capital assets, a capital assets are things like houses, bank accounts, shares and the income, say many people earn. Now the fact that we're talking about divorce and financial law as it applies in England and Wales means that in addition to the legislation, so the Matrimonial Courses Act, you've also got all the different cases that have been decided by the courts over the years, which interpret that law. And I think this is where things start to really highlight how discretionary the family court system is because in all of the cases that have been decided and where the judgments have been published, as known as a reported case, the judges talk about these legal principles and although they are only applying the principles to that particular case, sometimes what they say can actually be so fundamental that it actually influences how family cases are decided moving forwards, it establishes what's known as a legal precedent. And so all of our years at law school, all of our updated training alongside the day job is focused on understanding how those family law cases that are being decided by judges day in day out, how does that help us to understand and interpret those key principles? And that point is really made, isn't it, by the fact that the key bit of legislation, the key bit of law is from 1973? But the reason that it still applies and that it still works and that judges are still able to use that is that case law is able to interpret it and work with it to follow trends in sometimes trends in society, but certainly trends that judges have picked out as time goes on. And probably the biggest principles that have come out of cases rather than out of legislation are these three concepts of needs of compensation and of sharing. So we've got our key principles in mind. We know that we're looking at the Section 25 factors from the Matrimonial Courses Act. We know that we're relying on the principles from case law and taking into account needs, compensation and sharing, but what are we actually applying those legal principles to? What assets are taken into account as part of a financial settlement? So when the court are doing what they would call their "computation phase", which is the phase where they're looking at what the assets are, then they're going to want to know all the assets to begin with. They're going to want to know assets that are held in joint names, they're going to want to know assets that are held in each of the spouses' individual names. They're also going to want to know assets that are held potentially between one of the spouses and their brother or their sister or their friends. So essentially any assets that either person has any interest in should be included in the court disclosure so that the court is aware of it. Now that doesn't mean that they're going to necessarily make any orders on all of those assets, but they should be aware of all the assets. And then what they would do is look to try and group these assets into matrimonial assets and non-match manial assets. So for the purposes of today's podcast, matrimonial assets are assets that have been generated during the marriage. The matrimonial home, for example, is usually considered a matrimonial asset, savings and income and pension that have all been generated and earned during the marriage would all be matrimonial assets. An example of a non-match manial asset would be if a couple got married at the age of 50 and they had already accumulated assets in their names before the marriage, so pensions or savings, those could be considered as non-match manial. Or another example might be assets that have been inherited from family members and have been kept out of the matrimonial assets, so have been kept separate. It's an area that can be complex and can be a source of debate and discussion, but I think for today's purposes, that's the general definition. And when the court are looking at those different pots, they're going to treat them slightly differently. So the starting point for matrimonial assets are that they should be divided equally and that non-match manial assets shouldn't be divided equally. They are only going to be used by the court if they are needed by the other person. I think you're right to highlight that it is quite a complex point and probably one that we could explore in a whole podcast, but it is also a point that I think is quite important to clients, to people going through a divorce, that they need to have the option to explore at an early stage with their lawyer, whether this separate asset or whether this pre-existing asset can be treated differently. And a lot of time can be spent discussing this both in advice with the lawyers, but also in the negotiations of actually how are we going to classify this asset so that we know what legal principles we're going to apply to it as part of any settlement. Now of course all of the conversation so far has been focused on people being up front and providing all of this information so that we know what principles can be applied to it. Not everybody starts their discussion about their divorce settlement from quite as an open and transparent perspective. What do you say to clients who think that they can hide an asset so that it's not taken into account? I tell them it's a bad idea, it's the short answer. I think that I've certainly had cases that I've been involved in, where people have sought to try and move assets out of the reach of the court. Often that is payments to family members, sometimes to friends, and the attempt is to try and move the money out of their bank account so that it's not there as part of the divorce. But what almost always happens is that the court will see this and they will see a movement of money from your bank account going to your friend or your parents and they will often take steps to attribute that money back into the pot. Or they could just say well that's money you've already had and will allocate it in that way. So it's a bad idea, you're never going to be the first person to have come up with the idea, the court will have seen it all before to a large extent. And the court will look very suspiciously about anyone who talks about suddenly having loans to people that they didn't have loans before, that they don't have any documents to support, that they don't have any interest payments to support. And it's far better, we would say, as lawyers and as officers of the court, it's far better to play everything with a straight bat and to simply provide the disclosure and to be honest and open and provide full information to the court. Absolutely. And I think where I have seen parties try it in the past, perhaps before they've taken legal advice, what ends up happening is they not only have to still take into account the money that they were trying to hide, they actually then spend as much money again on legal fees in trying to explain what they've done, why they've done it, and to kind of correct that mistake as it were. So as you say Tim, no one is going to have thought of the first way of doing something. It is much better to just be open and transparent from the start. So we've talked a bit about, I think the way that the court approached the capital asset. I suppose one point that's worth mentioning now is that on a divorce the court have the power to share pensions. It's the anytime that a pension can be shared. And what that means is that an order can be made against the pension that removes a percentage of the pot, the pension pot from one spouse to another. It stays as pension, credit it can't be used as cash, but it means that it is taken out of one pension, moved across and put into somebody else's pension, so that it's managed completely separately, can be invested, completely separately, can be drawn down at different times in different ways. And it can be, and it often is, a very useful tool for the judge in order to ensure that there is fairness in the future upon retirement as well as just with the assets and the capital assets. And then I think the other topic we should just talk about is income. So Jen, do you want to just explain how the court creates income? Of course. So firstly, there's probably two parts of income and outgoing. If you've got children, there'll be the question of child maintenance. And even if you're going through a divorce, you will usually find that the starting point is to look at what the child maintenance service would assess as the right amount of maintenance to be paid. And for a lot of cases, that's both the starting point and the end point. There are in some cases, though, added provisions for spousal maintenance or sometimes called spousal periodical payments. In that situation, you have one person paying a monthly amount usually to the other person and the court will decide or the parties will agree what the amount of that maintenance should be and also how long it should be paid for. Maintenance is looked at in a slightly different way to the capital assets. And one of the biggest points we can make as part of this overview podcast is the fact that maintenance focuses on needs. There's no concept of sharing when it comes to income. So you're not looking at this from the perspective of, well, I would like half of my spouses, £100,000 salary, please. As the person claiming maintenance, you would be articulating what it is you need, the extent to which you can try to meet your own needs, whether that's through work, through claiming benefits, through interest on savings and things, and to identify where you have a shortfall. The court then has to see whether the other person has the affordability to be able to help meet that shortfall. So it's a slightly separate exercise from the way in which the capital and pensions are looked at. But again, it falls within this remit of quite a discretionary approach with the court trying to balance what's fair overall between the parties. And I think it's fair to say that it's a more detailed exercise that people maybe think because it involves the court looking at budgets, understanding how much is being spent on items such as utilities, shopping, holidays, everything. So it can be quite a labour intensive exercise to go through your budget and really understand how much is needed. But as you say, the court can be looking at budgets, earning capacity, standard living and an ability to pay, and they'll come up with a figure. And it's also the area that people may have heard of the term clean break. It's probably helpful to explain what a clean break means. And in legal terms, what a clean break really means is that one person isn't going to be paying the other person any maintenance, any money on a monthly basis, any spousal maintenance. And the court do have a duty to consider whether or not a clean break is possible because ideally, they do want people to be financially separate and financially independent of each of the moving forward. So the court will have a mind to that. But it will depend on the facts of each case as to whether that's possible immediately or whether it's maybe possible in the future. An example might be that somebody has been out of work due to caring for children for a period of time and they need some time to get back into work, get their earning capacity back up to where it was or where it needs to be. And so it could be that you have an immediate clean break. It could be that you have a clean break in five years time and ten years time. Or it might be that in a very rare case, you don't have a clean break, but that's what the term prefers to. Absolutely. And I think with all of this, the court is trying to give couples as much certainty as possible if it's deciding the outcome. And in a couple who are negotiating their settlement, they want that certainty of having all of the elements of their agreement summarised into a court order. So they know where they stand so that they can plan for the future. And as part of that, knowing if how and when you are going to end your financial ties to each other is a really important point. So let's just have a think about what orders the court can actually make. So we've talked about capital we've talked about income, we've touched on pensions, but I think it might be helpful just to run through the actual orders that a court can make. Oh, now you're testing me Tim. Let's see here. Let's give it a go. So I always start by thinking about the property orders. I think most people will be focused on their house and where they're going to live after their settlement. So I think it's important that people are aware that the court can order a sale of a property and the court can also order the transfer of a property, whether that's from one person's name into the other person's name or whether that's from joint names into one person's name. And I think that that can be quite an important way of making sure that housing needs are met and sorting out what is often one of the key assets in a financial settlement. It's worth adding, I think, that a order for sale, for example, doesn't have to be made immediately. It could be made at a point in the future. So you could have a scenario where the children and the family were going through GCSEs or A levels or any other type of exam and the couple decide that actually we don't want to sell this year, but we will sell next year. And that's completely possible and fine. The court can make an order that says the property shall be sold or shall be placed on the market on a date fixed in the future. So next on my list, I will normally touch people about the payment of lump sums of money. Now, again, we're thinking about the court's very specific powers and the judge is working within a framework that says person A shall pay to person B and amount of money. So the court wants to be clear in the court order what the amount of money involved is when it's got to be paid by. And sometimes the court will even go as far as to say what happens if it's not paid by that deadline, usually by adding in a provision that interest has to be paid on the amount owed. Often a lump sum order will be made to help to balance out one person keeping the property, but it can also be used to make sure that savings and investments in one person's account are shared fairly. Right. On to pensions. Now Tim touched earlier on the fact that pensions can be shared and that is where they are taken, where one pot is taken and a specific percentage moved from one party's name into the name of the other party. And I think pension sharing, as it's called, is probably the most common way in which pensions are changed within the divorce process. There is a slightly outdated less common approach, which is to have what's known as a pension attachment order, but because of the way that works and because of the way it doesn't necessarily leave the party's independent of one another, those pension attachment orders are becoming much less common. One of the words that is often used when talking about pensions is offsetting. Now again, probably a whole topic for another podcast, but in everyday language, offsetting is where you look to trade off the value that's in their pension with one of the other assets or a combination of the other assets in the case. Whether that's right for you in your particular case is quite a complex decision, and whether the court thinks that that's a fair outcome is subject to a number of different factors. One of the things that the courts will try to protect against is a situation where one party has all of the assets that are available now, and the other party has the assets that are available in the future, for example, a pension, which really the value comes when it's income in your retirement. Finally, the court has the power to order the payment of maintenance, and as I mentioned before, it's an amount of maintenance, the frequency of the maintenance, and how long those maintenance payments are going to last for. Brilliant. So that's property orders, property adjustment orders, so orders to transfer property or orders for sale. That's lump sum orders, which are orders for money to be paid. There's orders to share pensions, and then there's orders for maintenance. Mod dungeon. That across everything off the lift. So what do all these legal principles, and all these factors, and all these different court powers actually mean to someone who is going through divorce and trying to sort a finances out? So I think from a high level, what this means is that the stages of what you have to do start off with the what is there, which is the disclosure, it's understanding what the assets are, where they are, who holds them, how much they're worth, and potentially looking at what's matrimenial and what's non-machrimenial. So that's stage one. And then once you understand what there is, then you look at moving into how are these assets going to be shared. And in order to do that, you'll need to think about where you're going to live, you'll need to think about where any children are going to live, whether they're going to live with one of you, whether they're going to live with both of you, how much space do you each need in your houses, and where do those houses need to be? You'll need to think about your income, how you're going to meet your day-to-day costs, what are your day-to-day costs, what's the budget, how much of that are you meeting from your own income, how much of that could you meet from your own income in the future, and when will you be able to increase your income to do that? And then the third point, as Jen mentioned a few minutes ago, is retirement, and it's important not to forget that, sometimes easily forgotten because it's not the here and now, but how are you going to provide for your retirement, is it going to be through a pension, is it going to be through downsizing your property, is it a combination of both what's your pension provision currently, and what will it look like upon retirement? And actually, this stage is an ideal opportunity to involve a financial advisor, a pension expert, and to do your research and look at properties, values, mortgage rates potentially. This is the stage that you're wanting to find out all of that information so that you can look to make an informed choice and really understand offers you're going to make, or potentially a settlement you're going to reach, so that you don't regret anything in a few years' time. I think that's a really important point, Tim. It's, it is really a combination of clients bringing the practical side of what they want their life to look like, with the lawyers bringing to the table the legal principles and the factors that would be taken into account by the court if it was deciding the settlement. It's not just about the law, it's not just about what you want. I think it's actually a careful combination of the two, and of course it's not just what one party wants, it's actually what do you both need out of this situation? And I think sometimes one of the key points I encourage clients to think about is not just what the settlement means for them, but what does it mean for their clients? Nobody wants to be in a position where you're sorted, but the kids are coming back from spending time with their other parents saying, oh, the house was cold because the heating wasn't on. I think that's right, and I remember a judge making the comment that for the majority of people, this isn't about keeping the same standards of living that they had during the marriage because it's not going to be possible. You're not going to have the assets to be able to have two properties at the same level that you had one and to have two houses being run on the same budget as you had one. The 99.9% of the population, that's not possible. And this judge in that case talked about sharing the reduction in standard living between the two of you. So that actually, it's about trying to keep fairness by both of you having the same compromises or similar compromises, rather than having one person living the high life and the other person living the low life. Absolutely. And I'm not sure where we stand on mentioning brand names in our podcast team, but I always refer back to it by an analogy of supermarket. If you've both usually shopping in Sainsbury's, the divorce is not about one of you having to become reliant on a food bank while the other one upgrades to weight rows or marks and spences. It's about you finding that fair middle ground where perhaps it's sometimes Sainsbury's, possibly sometimes Tesco's. Exactly. Well, on that bit of free advertising, hopefully that given everyone a helpful overview, it is a complicated area and the nature of that is the discretion that the courts have. But in summary, there isn't a standard formula. It's a very discretional system. If you to ask five judges the outcome of a case you're likely to get five slightly different answers, but all the answers should be within the bracket. There is a very limited statutory or legal framework and this place to start is section 25 as a matrimonial cause is act. But the overall aim of the court is to achieve a fair outcome. That will be different in every case, but as a starting point, thinking about sharing matrimonial assets and then ensuring both parties needs are met, you won't get far wrong. Each of the fact that we've spoken about could be a podcast in its own right. But hopefully we've given you a helpful overview of the way in which the law works in practice. If there's a particular area that you would like us to focus on in a future podcast, then please do get in touch through the usual channels.