The treatment of an inheritance in a property settlement is one of the most common and sensitive issues in family law. Many people assume that an inheritance automatically remains with the person who received it. However, under Australian family law, that assumption is often incorrect.
Whether an inheritance is included in a property settlement and how it is treated depend on the particular facts of the case.
Timing, the size of the inheritance, how it was used, the length of the relationship and the overall financial circumstances of the parties are all relevant and important considerations..
How Does Australian Family Law Treat Inheritances?
Under the Family Law Act 1975 (Cth), there is no fixed rule that an inheritance must be excluded from, or automatically included in, a property settlement after separation. Instead, the Court has broad discretion to make orders that are just and equitable in light of the particular circumstances of each case.
In practice, this means:
- An inheritance is not automatically protected from being considered in the property pool.
- It is not automatically divided equally between former spouses or partners.
- Instead, the Court looks at the inheritance alongside the couple’s overall financial circumstances, including each party’s financial and non-financial contributions, their future needs, and whether the proposed property division is just and equitable.
The way an inheritance is treated also depends on its legal status at the time of the property settlement, like:
- An inheritance that has already been received is generally treated as property and may form part of the asset pool.
- A vested entitlement under a deceased estate may also be treated as property, depending on the nature of the beneficiary’s interest and the stage of the estate’s administration.
- A potential future inheritance from someone who is still alive is generally regarded as a mere expectation rather than a legal entitlement. As a result, it is usually not considered property, although in some circumstances it may be relevant when assessing a party’s future financial resources.
Ultimately, there is no one-size-fits-all approach.
The Court assesses an inheritance within the broader context of the parties’ financial circumstances and aims to make orders that are just and equitable.
When May an Inheritance Be Included in the Asset Pool?
As explained above, an inheritance may be included in the asset pool for property settlement depending on the facts.
The key considerations are when the inheritance was received, how it was used and the overall context of the relationship.
Inheritance Received Before the Relationship
Inheritances received before a relationship commonly form part of the initial contributions of the recipient. They are often treated as a financial contribution made by or on behalf of that party.
However, the significance of that contribution may reduce over time, particularly in long relationships where both parties have made substantial contributions to the accumulation and maintenance of assets.
Inheritance Received During the Relationship
Inheritances received during a relationship are generally considered as part of the financial contributions of the recipient. How it is treated in the final property division depends on factors including:
- Whether the inheritance was kept separate or mixed with joint funds
- Whether it was used for joint purposes, such as paying down a mortgage, funding renovations or covering living expenses
- The size of the inheritance relative to the overall asset pool
- The length of the relationship and the contributions of the other party
Where an inheritance has been applied to joint assets or used for the benefit of the family, it is more likely to be closely connected with the overall asset pool.
Inheritance Received After Separation
An inheritance received after separation is not automatically excluded from consideration. The Court may still have regard to it, particularly where property settlement proceedings are ongoing.
In many cases, an inheritance received after separation is treated as a contribution made solely by the recipient. However, the Court may still consider it as a financial resource when assessing future needs.
How the Court Assesses Property Settlements
When determining a property settlement, the Court generally adopts a well-established four-step methodology developed under the Family Law Act 1975 (Cth). While each case turns on its own facts, this framework assists the Court in reaching a just and equitable outcome.
1. Identifying the Property Pool
The Court identifies the assets, liabilities and financial resources of both parties. This can include real estate, bank accounts, investments, superannuation, business interests, trust interests and inheritances.
2. Assessing Contributions
The Court assesses the financial and non-financial contributions of each party. An inheritance is generally considered a financial contribution made by or on behalf of the recipient.
3. Considering Future Needs
The Court considers the future circumstances of each party, including age, health, income-earning capacity, care of children and financial resources. An inheritance may affect this assessment, particularly if it significantly improves one party’s financial position.
4. Determining Whether the Outcome Is Just and Equitable
Finally, the Court considers whether the proposed division of property is just and equitable in all the circumstances. This is the overarching requirement in every property settlement.
Protecting an Inheritance in a Property Settlement
While no strategy can guarantee a particular outcome, there are practical steps that may assist in protecting inherited assets.
Binding Financial Agreements
A properly prepared Binding Financial Agreement (BFA) can address how inheritances are to be treated if the relationship ends. A BFA must be entered into with independent legal advice and full financial disclosure to be enforceable.
Keeping Inherited Assets Separate
Maintaining inherited funds or assets separately from joint finances may assist in demonstrating that the inheritance remained an individual contribution. Clear records and separate accounts can support this.
Clear Documentation
Retaining documentation such as probate records, bank statements, trust documents and investment records can help establish the source and treatment of inherited assets.
Early Legal Advice
Obtaining legal advice early can help you understand how an inheritance may be treated and plan accordingly. This is particularly important before entering into any agreement or transferring assets.
The Role of Property Conveyancing Services in Property Settlements
Where a property settlement involves the transfer of real estate, such as the family home or an inherited property, professional conveyancing support plays an important role. A conveyancer can assist by:
- Preparing and reviewing transfer documents
- Ensuring compliance with stamp duty and land tax requirements
- Coordinating with lenders and financial institutions
- Lodging documents with Land Services Victoria to complete the transfer of ownership for properties located in Victoria.
Engaging experienced conveyancing support can help ensure that property transfers arising from a family law settlement are completed correctly and efficiently.
Why Every Case Is Different
There is no universal formula for how an inheritance will be treated in a property settlement. Each case turns on its own facts.
For example:
- An inheritance received early in a long relationship and used to purchase the family home; and
- An inheritance received shortly before or after separation that was kept entirely separate from the parties’ joint finances.
The Court considers the parties’ financial history, contributions, future needs and the overall asset pool. Advice tailored to your individual circumstances is essential.
Conclusion
An inheritance is not automatically excluded from a property settlement. Equally, it is not automatically divided between the parties. The Court considers factors such as the timing of the inheritance, how it was used, the parties’ respective contributions and whether the proposed outcome is just and equitable.
If an inheritance forms part of your financial circumstances during separation, divorce or the end of a de facto relationship, obtaining advice from experienced family lawyers in Melbourne can help you understand your legal position and develop an informed strategy.
The experienced family law team at Tonkin Legal Group provides practical legal advice regarding property settlements, inheritances, financial agreements and related family law matters for both married and de facto couples. Where appropriate, the firm can also discuss available legal funding options to assist eligible clients throughout the property settlement process.