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 Court exercises its 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.
The beneficiary argues that the inheritance should be excluded from the asset pool. 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
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:-
- towards the accumulation of assets still in existence at the time of separation; or
- 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 as a financial contribution by the party who received it, to be considered along with other contributions made by the parties to the family.
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 more likely to be included in the asset pool if there was no other property for division between the parties.
The Court will consider who the intended beneficiary of the inheritance is: did the 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 an inheritance is received by one party and is intermingled with the parties’ other assets before separation, it will normally be included in the asset pool.
If a deceased’s Will left an inheritance to one spouse but the other spouse contributed to the inheritance, there is an argument that the inheritance should be included in the asset 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 of Australia (‘the 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 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 and their partner could enter into a Financial Agreement under the Family Law Act 1975.
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.
Here to Help
Contact us now for free no-obligation telephone advice about the Court’s treatment of inheritances in family law property disputes.
