What’s mine is yours

There is a common misconception that, when a couple separates, if one party has received an inheritance during the relationship, it should be protected and considered separate from the pool of assets available for distribution between the parties. However, in reality the family law courts exercise a lot of discretion as to whether to include an inheritance in the asset pool.

Separating couples to a property settlement often argue over an inheritance because the recipient feels entitled to hold on to what a loved one has left them, or to keep that asset or money within the family, particularly if they have received it just before or after separation. They argue that it should be excluded from the asset pool and the other spouse argues that, as property that exists at the time of the property settlement, it should be included in the pool.

Unfortunately, there is no simple answer to this issue. Whether an inheritance will be included in or excluded from the asset pool depends on the facts of the particular case.

What the Court may consider

The timing of the inheritance

If an inheritance is received by one spouse shortly before or after separation and has been quarantined from the rest of the pool of assets accumulated during the relationship, there may be an argument that the inheritance should be excluded from the asset pool.

If an inheritance received by one party at the start of or during a relationship has been applied:-

1. towards the accumulation of assets still in existence at the time of separation; or
2. for the benefit of the family

then the Court does not separate the assets bought using the inheritance from the pool or return the inheritance to the recipient before dividing the rest of the asset pool.

The inheritance is taken into account when dividing the asset pool. It is considered a financial contribution by the party who received it, to be considered along with other financial and non-financial contributions made by the parties to the care, welfare and development of the family.

The size of the inheritance

Parties are understandably reluctant to spend legal costs arguing about whether a relatively modest inheritance should be included in the asset pool. Higher legal costs may however be considered necessary where an inheritance would comprise the bulk of an asset pool when included in the pool.

Where separating parties have been together for a long time and have both contributed during the relationship, an inheritance received late in the relationship is likely to be included in the asset pool if there was no other property for division between the parties.

The intended beneficiary of the inheritance

The Court will consider who the intended beneficiary of the inheritance is. Did the deceased’s Will leave the inheritance to just one spouse or both? The Court is more likely to include the inheritance in the asset pool if the deceased’s intention was to leave the it to both spouses or for it to benefit the entire family.

If the inheritance has been intermingled with joint assets.

If an inheritance is received by one party and is intermingled with the parties’ other assets before separation (for example, it is applied to renovate a jointly owned property or to reduce a mortgage) it will normally be included in the asset pool.

Contribution to the inheritance

If a deceased’s Will left an inheritance to one spouse but the other spouse contributed to the inheritance (e.g. providing care and support to the Will-maker over the years) there is an argument that the inheritance should be included in the asset pool.

For example, if one spouse receives an inheritance during the relationship which is applied to the accumulation of assets or for the benefit of the family. Then, just before separation, the other spouse receives an inheritance but argues that it should be excluded from the pool. The Court would take the earlier inheritance into consideration when determining whether to include the later inheritance in the pool.

The risk of losing an inheritance

It is important to consider how future inheritances for your children and grandchildren should pass to them after your passing if they are in relationships that may come to an end.

Will-makers concerned about protecting a child or grandchild’s inheritance from a future property settlement claim by a third party should consider holding the inheritance in a testamentary discretionary trust created by their Will.

While no structure is foolproof against the powers of the Federal Circuit and Family Court, how the testamentary discretionary trust is set up is key to the level of protection that it can offer.

Consider who controls the trust. If the beneficiary going through a separation is the sole controller of the trust, it will offer very little protection from the powers of the Federal Circuit and Family Court. It would most likely look through the trust and include the inheritance in the asset pool.

Financial Agreements

If a child or grandchild has received an inheritance or anticipates receiving an inheritance and wants to protect the inheritance from a potential claim by their partner, they could enter into a Financial Agreement under the Family Law Act 1975 with their spouse.

A Financial Agreement can be entered into before the commencement of a de facto relationship or marriage, or during the relationship or marriage. It can provide that, in the event of separation, in a property division an inheritance already received or which may be received in future is retained by the recipient of the inheritance.

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