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How is your inheritance treated in a family law property settlement?

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Attwood Marshall Lawyers Senior Associate Hayley Condon joins Robyn Hyland on Radio 4CRB to discuss common misconceptions about what happens to someone’s inheritance they have received during a relationship if they then separate and go through a family law property settlement. There are several factors a Court may consider when determining if an inheritance should form part of a matrimonial asset pool or if it should be excluded.  

What’s mine is yours

There is a common misconception when a couple separates, that if one party has received an inheritance during the relationship, that it should be protected and be considered separate from the matrimonial asset pool.

When it comes to inheritance and a family law property settlement, the family law courts exercise discretion about whether or not to include inheritance in the asset pool to be divided between separated couples.

An inheritance often causes disputes when it comes to a property settlement between separating couples because there is a level of entitlement about keeping that asset or money within the family and holding on to what has been left to them by a loved one. This is especially the case if the inheritance is received shortly prior to separation or after separation.

As you can imagine the party who is the recipient of the inheritance adopts the position that it should be excluded from the asset pool and the other spouse adopts the position that the inheritance should be included in the pool as it is property that exists at the time of resolution of property matters.

Unfortunately, there is no simple answer to this issue. Family law is an area of the law where the Court has a great deal of discretion and case law has shown that whether an inheritance will be included in an asset pool or not, will come down to the facts of the particular case.

Factors a Court may consider when determining if an inheritance should form part of an asset pool and be split in a property settlement

The timing of the inheritance

If an inheritance is received by one spouse shortly prior to separation or after separation and has been quarantined from the other property that makes up the asset pool accumulated during the relationship, then there is an argument for the inheritance to be excluded from the asset pool.

If an inheritance is received by one party around the time of the commencement of the relationship or during the relationship which has been applied towards the accumulation of assets that may still exist at the time of separation or for the benefit of the family, the Court does not separate the assets acquired with the inheritance from the pool or in essence give back the inheritance to the recipient before dividing the remaining assets in the pool.

That being said it does not mean the inheritance is forgotten. It will be taken into account when dividing the asset pool between the parties. The inheritance would be regarded as a financial contribution by the party who received it, which would be considered along with any other financial and non-financial contributions made by the parties to the care, welfare and development of the family.

The intended beneficiary of the inheritance

The Court will consider who the intended beneficiary of the inheritance is. Was the inheritance left to both spouses or just one spouse in the Will of the deceased? If the intention was to leave the inheritance to both spouses or for it to benefit the entire family then it is more likely that a Court will include the inheritance in the asset pool.

The size of the inheritance

If the inheritance is relatively modest then there may be no utility for separating spouses to argue over whether it should be included in the asset pool or not due to the legal costs that they would incur in doing so. However, there are cases where the inheritance makes up nearly all of the asset pool for division between the parties when included in the pool. Where the separating spouses have been together for a lengthy period and have both contributed during their relationship, then 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.

Contribution to the inheritance

If inheritance has been left to one spouse in the deceased’s Will but the other spouse can be regarded as having contributed to the inheritance (for example providing care and support to the Will-maker over the years) then there is an argument for the inheritance to be included in the asset pool. Another relevant consideration is if one spouse receives an inheritance during the relationship which is applied by the couple while they are together to accumulate assets or for the benefit of the family and then shortly prior to separation the other spouse receives an inheritance but is of the view their inheritance should be excluded. This is a matter that a Court also gives consideration to when determining if the later inheritance should be included in the pool.

If the inheritance has been intermingled with joint assets.

If the inheritance received by one spouse has been received prior to separation and has been intermingled with other assets owned by the parties before separation (for example cash has been applied to reduce a mortgage or renovate a jointly owned property) then the inheritance will ordinarily be included in the asset pool.

Property settlements by their nature can evoke strong feelings and a battle over every asset no matter how minor. But bringing an inheritance into the mix when a spouse has lost a loved one at a time when they are going through a relationship breakdown and then being faced with the real prospect of their estranged spouse receiving part of their inheritance, can be extremely difficult to navigate.

Anyone who finds themselves in this situation should get advice from an experienced family lawyer. A family lawyer can help you understand how the inheritance may be dealt with under the law in your unique situation, and how to negotiate the fairest outcome.

Estate planning and mitigating the risk of an inheritance being lost in divorce proceedings

It is extremely important to consider future inheritances for children and grandchildren and how such inheritances should pass to the intended beneficiaries after death if those loved ones are in relationships that may come to an end. This is an integral part of formulating your estate plan when writing a Will and determining what strategies you may need to put in place to protect any inheritance you want to keep in the family. 

A common strategy that can be used to provide protection around a child or grandchild’s inheritance from a future property settlement claim is for the child or grandchild’s inheritance to be held in a testamentary discretionary trust created by your Will. A testamentary discretionary trust offers protection around the child’s inheritance from third party claims and is an option that should be considered by Will-makers who share this common concern.

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

Proper consideration needs to be given to who controls the trust. If the beneficiary in question who is going through a separation or divorce is the sole controller of the trust, the trust will offer very little protection from the powers of the Federal Circuit and Family Court of Australia, and it is very likely your child will find that the Court is prepared to look through the trust and include the inheritance in the asset pool to be divided with their estranged spouse.

An experienced estate planning lawyer can provide advice on the best possible structure when setting up a trust in your Will to ensure maximum asset protection can be achieved.

Financial Agreements – Protecting an inheritance during your relationship

If a child or grandchild has received an inheritance or anticipates receiving an inheritance in the future and wants to take steps themselves to protect the inheritance from a claim by a current spouse, the child or grandchild could enter into a Financial Agreement under the Family Law Act with their spouse.

These types of agreements can be entered into prior to the commencement of a de facto relationship or marriage, or during the relationship.

This is another tool that can be used to provide protection in relation to an inheritance.

It is not uncommon to see parties who are about to enter into a relationship, or even during a relationship, making a Financial Agreement which provides for an inheritance that has already been received or that may be received in the future being retained by the spouse it was left to in any property division if they separate in the future.

The terms of the property settlement are set out in an agreed document prior to the separation occurring.

If your child or grandchild is interested in putting a Financial Agreement in place, they should obtain advice from a solicitor that practices in the area of family law to ensure that the agreement is drafted correctly to protect their interests under the Family Law Act.

For a Financial Agreement to be binding under the Act the parties to the agreement must obtain independent legal advice from their own solicitor before signing the Agreement.

The best approach to this issue is looking at the options available to you and your child or grandchild now and taking action to protect the inheritance before a relationship breakdown occurs, ultimately avoiding the risk of your child or grandchild ending up in a costly legal battle fighting their estranged spouse over the inheritance in the future, if the unexpected does happen.

Attwood Marshall Lawyers – helping families resolve disputes and maintain positive relationships

Attwood Marshall Lawyers have been helping families navigate separation, divorce, and disputes, for over 75 years. With specialist departments practising in Family Law as well as Estate Planning, we have the legal expertise to ensure your family and your assets are protected when faced with a family law matter.

If you are going through separation and negotiating a property settlement, it is important to seek reliable and trusted advice from an experienced family lawyer.

We are of the view that no two cases are the same. We are dedicated to listening to your needs, assessing your family situation, setting goals and formulating a strategy to achieve the most favourable outcome in a timely way.

We understand that going through a relationship breakdown is an extremely sensitive and emotional time in your life. Our team will guide you through the process to reduce tension between parties and help you move on with your life.

If you would like to make an appointment with one of our family lawyers, please contact Family Law Department Manager, Donna Tolley, on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or free call 1800 621 081.

Alternatively, you can jump on our website and book online instantly. Click here to book an appointment now.

Read more:

Are we more than “just friends” in the eyes of the law? Understanding your entitlements or obligations when a de facto relationship ends

Prenuptial Agreements, Relationship Agreements, Financial Agreements – what’s the difference, and do we need one?

You’ve separated from your partner – so what happens next? Property settlements and determining who gets what!

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