Can I keep it?: Inheritances in Family Law Property Settlements

Many Australians may have received, or are set to receive, some type of inheritance in their lifetime.  Thanks to the general rise in property prices over the last 30 or so years, such an inheritance may be significant.

So, what happens to the inheritance, and how is it treated if your marriage or de facto relationship breaks down?   What if it was received before the breakdown? After? What if it was applied to joint assets? What happens then?

These are just some of the questions which may spring to mind when contemplating what might happen to your inheritance in a relationship breakdown.

This article is designed to provide a general overview as to how an inheritance may be treated in the context of a family law property settlement.

Is my inheritance automatically “quarantined”?

Most people may assume (or hope) that inheritances are excluded from a family law property settlement, and that they are “quarantined”.  Therefore, some may be surprised to read, that inheritances are not excluded or automatically quarantined in a family law context.

Any inheritance that one party to a family law matter has received is an important consideration in their family law property settlement. Even more so if the inheritance is or is likely to be a significant one.

So, how is my inheritance treated by the Court?

The treatment of an inheritance by the Federal Circuit and Family Court of Australia depends on a number of factors.

Before we consider how an inheritance is treated, we first need to look at what the Court considers generally when determining who should get what share of the asset pool in a family law settlement.  These factors are generally:

• Is it just and equitable to adjust property between the parties?

• What are the assets and liabilities of the parties and their value? 

• What were the initial contributions of the parties prior to the relationship? 

• What were the financial and non-financial contributions of the parties during the relationship?

• What were the contributions as homemaker and/or parent?

• What are the future needs of the parties? 

The treatment of inheritances in family law property settlements is usually determined on a case-by-case basis by the Court. This means, each case is determined on its own facts and circumstances – no two cases are the same, as no two families or their circumstances are the same (though there might be some similarities).

Generally, the treatment of an inheritance in a family law matter depends on a number of factors, such as:

• When the inheritance was received;

• How the inheritance has been used or applied;

• The contributions and future needs of the parties to the relationship generally; and

• Whether the inheritance has been received, or simply whether it is just expected to be received at some point in the future.

Determining the asset pool

When determining the asset pool available for division in a family law property settlement, all property owned by either party, regardless of how it is owned, such as in joint names, sole names, or through a business for example, forms part of the asset pool available for division between them – including any inheritance that has been received.

It is also important to note in this context is that the asset pool usually includes assets or liabilities acquired post separation.

How an inheritance becomes relevant to a family law property settlement

There are generally 3 ways in which the issue of an inheritance can become relevant in a family law context:

• Firstly, an inheritance received during the relationship;

• Secondly, an inheritance received late in the relationship or after separation; or

• Finally, an expectation of a future inheritance.

Inheritances received during the relationship

An inheritance received during the relationship will generally be treated the same way as any other “contribution” made by a party during the course of the relationship.  In short, the inheritance is usually added into the pool. 

However, if this inheritance was substantial, and for example was applied towards the purchase of a property, then the person who received the inheritance would likely receive some credit or adjustment for the “contribution” they had made to the asset pool.  Notwithstanding this, contributions do erode over time, so it is important to obtain legal advice in relation to your specific circumstances.

Inheritances received late in the relationship or after separation

For an inheritance received late in the relationship or post separation, the Court has a discretion as to whether they stick with the one asset pool, or to quarantine the inheritance out of the main asset pool, by adopting an ‘asset by asset’ or ‘two-pool approach’.

However, even if the Court adopts this alternate approach (which is not guaranteed), the Court will still have regard to the inheritance received in that second pool when assessing the future needs of the parties in determining the overall division of assets.  This approach is also subject to whether there are sufficient assets in the primary asset pool to satisfy the non-inheriting spouse’s entitlements.  

However, there must be a clear distinction between excluding and quarantining in a family law context.  The ‘asset by asset’ or ‘two-pool approach’ is in contrast to a complete exclusion of an asset, which would remove it entirely from consideration.   Based on current case law and legislation, a complete exclusion of an inheritance is incorrect in the family law system.

Future inheritance

An expectation of a future inheritance is usually irrelevant in the context of a family law property settlement.

Given that anyone can change their Will at any time, as long as they are alive and have the capacity to do so, there is generally little certainty as to a future inheritance to be received.  A party may think that they will receive a large inheritance one day, but this may not eventuate and is rarely guaranteed.

It is not beyond the realms of possibility that a Court could consider the likelihood of receipt of a future inheritance, particularly given the case-by-case approach of the Court, but as to how this might play out when someone is alive and well and able to change their Will at any time, is uncertain.

What next?

If you have separated from your partner or spouse, it is important to obtain legal advice, and complete a family law property settlement in a timely manner.

Completing a property settlement, provided it is formalised correctly, will cut your financial ties with your former partner or spouse.  Cutting these financial ties is particularly important in circumstances where you may have an incoming inheritance, for example if you have aging parents.  

If you don’t formalise your property settlement, and then receive an inheritance, there is a real risk that the inheritance will form part of the asset pool available for division between you and your former partner or spouse.

Contact us

If you find yourself going through a family law separation, it is important to obtain advice from an experienced family lawyer. 

To book an initial consultation with one of our experienced family lawyers or please contact:

Ivy O’Dwyer
Associate
T 03 5226 8582
E iodwyer@ha.legal

Tara Paatsch
Principal Lawyer
M 0412 660 842 | T 03 5225 5254
E tpaatsch@ha.legal

Bridgette Kelly
Principal
M 0438 714 965 | T  03 5225 5275
E bkelly@ha.legal

Lisa Hunt
Principal
T 03 5226 8584 | M 0407 616 729
E: lhunt@ha.legal