Liferents as matrimonial property
Liferents are often used as a vehicle by which parties are able to protect assets for the next generation while still retaining use and enjoyment of the asset (usually a house) itself.
A liferent arrangement means that neither party “owns” the house. What the parties own is their interest in the liferent. An unintended consequence arose in a case that involved a liferent which was considered by a Sheriff at Airdrie Sheriff Court in the case Kelly -v- Kelly in 2021.
The circumstances in the case were not particularly unusual. The parties lived together for a number of years before they married. The wife had children from a previous relationship. She had sold a flat that she owned prior to the parties’ marriage and invested the proceeds of the sale from her flat and also applied inherited funds to purchase a house in which the parties lived together. The house was initially purchased in the wife’s sole name. The parties were not married at the time the house was purchased. They only married one another several years after the house was purchased. A few years after that, the wife decided to re-mortgage the house. She did so jointly with her husband. Title to the house therefore was transferred to the parties’ joint names.
When the parties were planning their estate and what should happen to their assets upon their deaths, they decided to transfer ownership of the house to the wife’s children. In order that they could continue to reside in the house, they reserved for themselves a liferent interest in the house. In basic terms, this entitled both parties to continue to reside in the house until their deaths, or such time as they decided they wished to vacate the house voluntarily notwithstanding that the wife’s children were the legal owners of the house.
The parties subsequently separated. As is often the case after separation, one of the parties moved out of the house. In this case the husband moved out and the wife remained in the house.
The argument between the parties related to whether the liferent was in fact matrimonial property, and if so, what value should be attributed to it in terms of calculating the net matrimonial capital. The wife sought to argue that the liferent should not form part of the matrimonial property. She did so on the basis that the husband could continue to live in the house under and in terms of the liferent. The husband had, in essence, lost “nothing”. The husband’s right to live in the house was not terminated by the parties’ separation and/or eventual divorce. On that basis, the wife maintained that the liferent should not form part of the matrimonial property and a value should not be attributed to it.
The husband argued that his interest in the liferent was matrimonial property and a value should be attributed to it.
There were various arguments by the parties as to how the Court proceedings had been conducted by both.
The Court noted that the wife could have asked for an order transferring the whole liferent to her sole name. She had made a deliberate decision, however, not to do so in order to advance her argument as set out above, namely, that the husband had not lost anything as the original joint liferent remained in place.
The Court accepted the husband’s argument that the value of the liferent did form part of the matrimonial property for the purposes of the Family Law (Scotland) Act 1985. It should therefore be taken into account as part of the calculation to establish the net matrimonial capital.
So, an arrangement set up by the parties to facilitate estate planning had significant implications in terms of the parties’ separation and divorce. Neither party, it seems, had considered the possibility of such a situation arising.
Further, if the Court did not regulate ownership of the liferent on divorce, then it would remain the joint property of the parties which would completely undermine the “clean break” philosophy of the 1985 Act. The Court noted that a major function of contemporary family law is to provide and enforce a system of rules whereby a couple’s capital and income can be re-distributed in a just way when their marriage ends in divorce. The Court only required, at this stage, to make a decision as to whether the liferent was matrimonial property. The next stage was then to consider the value of the husband’s liferent interest and the way in which the capital asset could be re-distributed in order that they were shared fairly between the parties.
It is therefore worth bearing in mind that the actions taken in order to achieve one outcome may well impact on other legal aspects of your life in ways which were unintended. In this case, what seemed a fairly straightforward way of re-arranging assets during the parties’ lifetimes – by using a joint liferent – resulted in contentious litigation and probably complicated the parties’ financial circumstances in a way which neither could have anticipated.
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