Inheritances and family law

Inheritance you have received, or are expected to receive, may be included as an asset available for division in a family law dispute. A common misconception is that inheritances can fall into a ‘protected category’ and are separate to the asset pool available for distribution between warring spouses.

In the case of Bonnici 1, Nicholson CJ, Nygh and Tolcon JJ when addressing the issue of whether inheritances should be treated differently to other property, resolved that the answer would depend on the facts and circumstances of each case.

In assessing matters on their individual facts and circumstances, consideration is given to the timing of receipt of the inheritance in question or the impact that the inheritance has on the size of the asset pool available for distribution.

Time of the inheritance and how inheritances have been applied

If the inheritance has already been received, it is included as property of the parties. However, the treatment of such an inheritance may vary.

The earlier an inheritance is received in the relationship, the less likely it is that there will be an adjustment in the receiving party’s favour at the time of settlement. In long term relationships, the inheritance contribution may be said to have been “eroded” over time. The parties also need to consider if a “springboard” argument can be made, that is, if the inheritance has led to future wealth, such a contribution may be less likely to be eroded 2. If the inheritance is significant, it is likely that some adjustment in favour of the receiving party is made on a contributions basis.

Provided that some of the inheritance received during the relationship is applied towards the benefit of the parties i.e. towards the payment of a mortgage or a purchase of an asset, generally the inheritance is treated as a financial contribution by the receiving party.

A party who has applied cash inheritances to the general needs of the family, may have a different argument to a party who received an inheritance in the form of say, real property, expended no money on it, and remains the owner of the same real property at the time of separation and at the time of trial. An asset received by way of an inheritance, which is still in existence in its original form and to which no contributions have been made, can be potentially quarantined from the asset pool available for distribution.

The Family Court in the matter of Lee Steere 3 stated:

“the relevance of the inheritance or gift to one party during the marriage may depend upon the use to which that property is put by the parties.”

It is possible that an inheritance received late in the relationship and closer to the separation date or after separation, may be quarantined from the balance of the assets available for distribution.

Prospective inheritances

A prospective inheritance, not yet received, is not considered to be property, as the testator may change his/her Will before dying. It may also be considered as a financial resource of the party expecting the inheritance.

If the inheritance is excluded from the asset pool available for distribution, adjustments can be made to the division of assets when taking into account factors contained in section 75(2) Family Law Act 1975 (Cth) (future needs of both parties), but commonly in cases where late inheritance has been received by one party, any adjustment for section 75(2) factors has been modest.

The Family Court in the case of Tulloch v White 4 stated:

“In a case where the testator had already made a Will favourable to the party but no longer had testamentary capacity and there was evidence of his or her likely impending death in circumstances where there may be a significant estate, and where there was a connection to s 75(2) factors, it would be shutting one’s eyes to treat that as irrelevant”.

It is also possible to apply to have court proceedings adjourned due to an expectancy of an inheritance. In the case of Grace v Grace 5, the wife sought an adjournment until the husband received his inheritance by way of family trust, or until his mother died. The wife was successful on appeal, and was granted an adjournment.

Size of asset pool available for distribution

The size of the asset pool available for distribution could affect the way an inheritance is treated in a family law matter.

If the asset pool is much less than the inheritance received, and it would therefore result in an unjust or inequitable division, the Court may use the inheritance to adjust for it.

The Family Court in the case of Bonnici 6 stated:

“if…there had been no other assets than the husband’s inheritance, but the wife had…clearly carried the main financial burden in the support of a family and also performed a more substantial role as a homemaker and parent…then it would clearly be open and indeed incumbent upon a Court to make a property settlement in her favour from such an inheritance”.

Who received the inheritance?

An inheritance received by one person is generally considered to be the contribution of that person. However, there are some cases in which the Family Court considers it to be a contribution made by both parties.

For example, if the non-receiving party has assisted in a significant way to care for the receiving party’s relative/friend leaving the inheritance, or if the non-receiving party had made improvements to real estate the subject of the inheritance without receiving any benefit, it may be argued that argument that the inheritance was also a contribution by the non-receiving party.

In the Marriage of Heath; Westpac Banking Corporation (Intervenor) 7, the wife was held to have contributed to money inherited by her husband from his parents because when his parents, especially his mother, were elderly and in need of assistance, she had helped look after them assumed that your inheritance is quarantined from a family law dispute. Given the broad discretion of the Court when dealing with inheritances in family law disputes, it’s not surprising to note that many parents are turning towards Financial Agreements as a way of protecting their children’s wealth and, as a way to quarantine any prospective inheritance that they intend to bequeath to their children.