INHERITANCE
Inheritance
The division of the net property pool can be complex and lead to many conflicts, especially if an inheritance has been or will shortly be received by one party. Is it fair for the receiving party of the inheritance to keep it all? Or should it become part of the net property pool available for distribution?
When making property settlement orders, the Court has broad discretion about how they consider inheritances received during a relationship and after separation.
When determining whether an inheritance will be included in the net property pool, the Court will consider various factors, such as:
- the timing and nature of the inheritance
- the length and nature of the relationship
- the financial circumstances of the parties
- any contributions made by each party during the relationship
- whether the inheritance has been kept separate from other property (also known as “quarantined”) or has been used for joint purposes (such as assisting with the purchase of the former matrimonial home).
Ultimately, the Court’s decision will be based on what is fair and equitable in the circumstances of each family law matter.
Inheritance 101: Family Law Edition
APPROACHES THAT MAY BE ADOPTED BY THE COURT
The Court also has broad discretion in dealing with post-separation windfalls, such as inheritances, in a property settlement. There are two main approaches the Court can adopt are:
- Firstly, the global approach, where the Court considers all the parties’ assets and liabilities and superannuation entitlements in one “pool” and divides it as a whole. This is the most common approach.
- Secondly, the asset-by-asset approach, where inheritance is considered as a financial resource separate from other assets and contributions are assessed differently. This approach is less common but has been applied in some cases.
It is important to remember that each family law matter is unique, and the approach taken by the Court is at its discretion.
WHEN WAS THE INHERITANCE RECEIVED?
The timing of when an inheritance is received can also impact the Court’s decision. If received during the relationship, it may be treated as a financial contribution to the joint asset pool. The longer the relationship, the less weight this contribution may have. If received post-separation, it may be considered a financial resource for the recipient.
For example, a $2,000,000 inheritance in a 3-year relationship may be treated differently from a $50,000 inheritance received during a 20-year relationship.
Was the Inheritance received prior to the commencement of the relationship:
An inheritance that was received before the commencement of the relationship may be considered an initial contribution by that party and may fall part of the property pool if the entirety or part of the inheritance is still available or the assets to which the inheritance may have contributed to, will be included in the net matrimonial pool available for distribution between the parties of a de facto relationship or marriage.
The value of the inheritance will nevertheless be considered when determining the party’s entitlement upon settlement.
In Sinclair & Sinclair [2012] FamCA 388, the Court considered the husband’s claim in the net matrimonial property pool of $7.3million, primarily made of the wife’s inheritance from her father’s estate before the relationship and invested before and during the relationship. Cronin J believed that if it were not for the wife’s father, the parties would not have had the net matrimonial property pool of wealth they had available to them at the date of the final hearing. Therefore, the primary judge made a finding that approximately three-quarters of the net matrimonial property pool available for distribution between the parties were unrelated to the parties’ direct contributions (that is, excluding the wife’s inheritance) and that the parties had equally contributed to the remaining one-quarter that was deemed available for distribution between the parties. However, an adjustment was made in the husband’s favour for future needs factors, namely based on his standard of living decreasing if left with only contribution-based entitlements.
Ultimately, the way the inheritance is determined comes down to the facts of the individual family law matter and the discretion of the presiding Judge at the final hearing.
Inheritance received during the relationship:
Inheritance received during the relationship may be assessed depending on how the inheritance was applied and the benefactor’s intentions. The Court may consider whether the inheritance was:
- applied to the benefit to both parties (such as improving the former matrimonial home or applied to the parties’ day-to-day everyday living expenses), it may be treated as a financial contribution by the party who received it; or
- kept separate from the rest of the assets, the Court will likely consider it separate from the pool.
In the matter of Elign & Elign [2015] FamCAFC 155, the primary judge determined that there would be no “special weight” given to the wife’s inheritance received 10 years before separation, in the sum of $1.3million, and concluded that considering a 40-year marriage and the net matrimonial property pool being in the sum of $44 million, that the pool would be divided equally.
Each family law matter is different based on the specific circumstances of the relationship and will be determined by the Court at its discretion accordingly.
Inheritance received late in the relationship or post separation:
The Court may consider inheritances received late or post separation as ‘protected’ and may not be considered as a contribution during the relationship by the receiving party instead, it may be considered as a financial resource of the receiving party. If this occurs, the Court may “exclude” or “quarantine” the inheritance from the net matrimonial property pool available for distribution between the parties.
The Full Court in Singerson & Joans [2014] FamCAFC 238 considered a 15-year relationship, whereby the husband received an inheritance of $3 million shortly after separation. The net matrimonial property pool was approximately $7.4 million at trial. The presiding Judge found that the wife had made more significant contributions during the relationship and post separation and despite the timing of the receipt of the husband’s inheritance that the Court would adopt a global property pool approach (that is, to include the post-separation inheritance received by the husband in the net matrimonial property pool to be divided between the parties). The husband did receive a 2.5% adjustment in his favour for contributions. However, no adjustments were made for future needs factors. Both the wife and husband appealed this decision.
In Bonnici & Bonnici (1992) FLC, the Full Court of the Family Court confirmed that inheritances are not a protected category of property and will not automatically be treated differently from other assets available for distribution. An inheritance, depending on when it was received by the party, must be formally protected to ensure it does not fall within the property pool.
Adopting a two-pool approach for dividing inheritances may lead to a “future needs” adjustment for the other party based on the remaining assets, according to subsection 75(2) of the Family Law Act. This medication may depend on how substantial the inheritance is compared to the remainder of the assets. It is important to remember that these adjustments are usually calculated as a percentage rather than through a mathematical equation.
In Elgabri & Elgabri [2009] FamCA 227, this matter involved a situation where the husband received a $527,000 inheritance from his uncle towards the end of the marriage. The funds remained in a bank account untouched, and the wife made no contributions towards them. The presiding Judge adopted a two-pool approach by separating the husband’s inheritance from the remaining assets in the pool of approximately $826,072. After determining that both parties contributed equally to the remaining pool, a 7.5% “future needs” adjustment was made in favour of the wife due to the husband’s inheritance.
PROTECTING INHERITANCE:
Coming to an amicable agreement about inheritance may require negotiation and compromise. However, the impact of these compromises may be unique to your circumstances and need to be weighed by you. An inheritance not intended to form part of the relationship must be protected as early as possible to avoid division upon property settlement. You may wish to enter into a binding financial agreement to protect the inheritance.
CONCLUSION
Ultimately, the Court has broad discretion regarding how they consider inheritances received before the relationship, during a relationship or post-separation and to ensure that the overall settlement received by both parties to a relationship is just and fair according to the Family Law Act.
It is important to remember that each family law matter is unique, and the approach taken by the Court is at its discretion.
If you have any questions or need legal advice concerning inheritances and how they may impact your property settlement, please contact us for a confidential consultation.
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