How are Inheritances Treated in a Family Law Property Settlement?

Inheritances can play a significant role in family law property settlements in Australia. The treatment of inheritances in these settlements is governed by a specific legal framework that is designed to ensure fairness and equity between parties. This article will explore the key considerations and factors that the court takes into account when determining the treatment of inheritances in property settlements.

Understanding the Legal Framework of Inheritances in Australian Family Law

In Australia, the legal framework surrounding inheritances in family law cases can be complex and multifaceted. The Family Law Act 1975 provides the legislative basis as to how inheritances are treated as part of property settlements.

When it comes to property settlements in family law matters, depending on whether the inheritance has been received or there is an expectation that it will be received in the future, inheritances can either be treated as an asset that forms part of a property pool that is to be divided between parties or a financial resource for the benefit who has the expectation of receiving it.  Irrespective of how an inheritance is categorised, a court must consider the nature, extent, and value of any inheritance received or expected by either spouse.

It is important to note that where an inheritance is treated as an asset, and as such forms part of a property pool, that it is not automatically divided equally between parties.  Instead, when a court is determining what ‘contribution’ each party has made to accruing or acquiring the wealth that makes up the property pool, it will have regard to whether the inheritance was received early in a relationship or towards the end. 

When the inheritance is received early in a long relationship, then depending on the amount of the inheritance, it is likely due to the passage of time that the court will not assess the recipient’s contribution to the property pool as being greater than the other party based on the inheritance. However, if the inheritance is received late in the relationship a court is more likely to find that this has resulted in an increase in the overall value of the property pool and the ‘contribution’ to that pool by the recipient of the inheritance is likely to be assessed as being greater. This would normally result in the recipient of the inheritance receiving a greater share of the property pool than the other party. How much greater that share would be depends on the individual circumstances of the case.

Where an inheritance has not yet been received and but there is instead an expectation that it will be received, the inheritance will not form part of the property pool that is to be divided between the parties. It may, however, be considered as potential future financial resource of a party. Where it is found to be a financial resource of a party, the court has the discretion to consider making an adjustment to how the property pool would otherwise be divided. For example, where the ‘contributions’ to a property pool are otherwise broadly equal by each party but one party has an expectation of receiving an inheritance, then to try and achieve a just and equitable overall outcome, rather than just divide the property pool equally, the court has the discretion to make an adjustment so that the person who will not have the benefit of the inheritance in the future receives a greater share of the property pool that is being divided. How much of an adjustment is to be made depends on a number of factors, and when assessing the impact of a potential future inheritance on how a property pool is to be divided, the court will take into account the amount of the expected inheritance and the value of the property pool that is being divided.

However, it is important to note that the court has a broad discretion when it comes to property settlements and how it treats inheritances. The mere fact that a party is recorded as a beneficiary under a will and has an expectation of receiving a future inheritance does not necessarily mean that the court will automatically categorise that future inheritance as a financial resource and make an adjustment in favour of the other party. Instead, the court will have regard to things such as the testamentary capacity of the person who has made provision under their will for a party and the possibility of that person changing their will in the future.

In short, the court will consider the individual circumstances of each case and make a decision that is just and equitable, or fair’, based on those circumstances.

It is worth noting that inheritances received after separation are generally treated differently than those received during the relationship. Often, inheritances received after separation are considered separately of the assets acquired during the relationship and which form part of the property pool that is to be divided between the parties.  Where the court adopts that approach and determines that an inheritance that was received post separation should not be divided between the parties, but instead should be wholly retained by the person who received that inheritance, it is likely that the inheritance will still be considered a financial resource to the person who received it and as such may result in the other party receiving a greater share of the property pool from the relationship.

Other Factors Considered by the Court in Property Settlements where there has been an inheritance received or where it is expected to be received.

In addition to considering how to deal with inheritances in property settlements, the court also considers a wide range of factors to ensure a just and equitable outcome:

The financial and non-financial contributions of each party to the marriage or de facto relationship

One of the key factors that the court takes into account in property settlements is the financial and non-financial contributions of each party to the marriage or de facto relationship. This includes not only the monetary contributions made by each party, such as income earned and assets acquired during the relationship, but also the non-financial contributions, such as homemaking, child-rearing, and support provided to the other party's career or education. Where an inheritance is received during the relationship, this is generally considered to be a contribution to the property pool by the person who received the inheritance.

The duration of the marriage or de facto relationship, including any period of separation

The duration of the marriage or de facto relationship, including any period of separation, is also taken into consideration by the court. A longer marriage or de facto relationship may result in a different treatment of inheritances compared to a shorter one. The court may consider the length of time the parties have been together and the impact of any periods of separation on their financial circumstances.

The future needs of each party, including their age, health, earning capacity, and financial resources

Another important consideration for the court is the future needs of each party involved in the property settlement. This includes factors such as their age, health, earning capacity, and financial resources. For instance, if one party has a higher earning capacity or has greater financial resources compared to the other, including financial resources other than in the form of an inheritance, the court may take this into account when determining how a property pool is to be divided.

Can a prospective inheritance be taken into account?

In some cases, the court may also take into account a prospective inheritance when making property settlement orders. However, the court must be satisfied that it is just and equitable to do so.

Factors such as the likelihood of the inheritance being received, the financial needs of the parties, and the overall property pool will be considered. The court will not make orders solely based on a prospective inheritance but can take it into account as part of the determining how to divide a property pool.

Assessing the Contributions of Each Spouse: Inheritances vs. Other Contributions

When determining the treatment of inheritances, the court recognizes that financial and non-financial contributions made by each spouse during the relationship may vary. It is essential to establish a clear distinction between the contributions made by an inheritance and those made through other means.

For example, if one party has made a significant financial contribution through an inheritance, while the other party has contributed non-financially by taking care of household duties, the court may give appropriate weight to both types of contributions.

The Influence of Inheritances on Spousal Maintenance Orders

Inheritances can also influence the court's decision regarding spousal maintenance orders. Spousal maintenance is an ongoing financial support provided by one party to the other after the breakdown of a marriage or de facto relationship.

If one party has received a substantial inheritance while the other is in a less favourable financial position, the court may consider this inheritance as a relevant factor when determining whether spousal maintenance should be awarded.

Importance of Seeking Legal Advice from Frigo James Legal

Given the complexities involved in determining how inheritances should be treated in family law property settlements, it is crucial to seek legal advice from Frigo James Legal.

Frigo James Legal has a team of knowledgeable lawyers who can provide guidance and representation throughout the property settlement process.