The process for divorce is by now well established but dealing with the division of assets can be complex and difficult. Divorce can be both financially and emotionally crippling to the couple involved. When it’s time to reach a financial settlement, the courts have a great deal of discretion to redistribute assets and income, regardless of origin. It is still a frequent feature of marriages that one party earns less, or perhaps does not work at all, and in such cases they will be reliant on an income from the other party going forward. If the marriage has been a long one or where there are children involved, or if the parties are older and have limited earning capacities, this maintenance may last for the remainder of the recipient’s life.

Ensuring continued payment

This income is allocated to meet regular outgoings and is relied upon by the recipient, whether they are male or female. Therefore, continued payment in the event that the paying party dies must be secured. There are several ways of ensuring continued payment: 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 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, and 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. 

Another way

Life insurance is therefore the securest way of ensuring 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.

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.

With regards to the payment of the policy premium, either party can pay and the recipient may prefer to if concerned as to whether their former spouse will keep 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.

The division of finances on divorce is likely to be the largest personal financial transaction that most people will ever undertake in their lives. It is important that both parties receive proper legal advice to ensure that decisions made at the time do not threaten future financial security. The provision of security for maintenance in the final financial order is an important part of these negotiations.

Thomas Duggins is a solicitor in the family office at Charles Russell..