It is not uncommon for a party to a marriage or de facto relationship to receive an inheritance either before, during or after their relationship. Put simply, unless the parties entered into a Financial Agreement (made pursuant to the Family Law Act 1975 (Cth)) setting out how any inheritance would be dealt with in the event of separation, then:
• the inheritance is not excluded or otherwise quarantined from the assets and liabilities to be divided between spouses following separation; and
• the amount of the inheritance is not allocated back to the spouse who received it.
How a Court determines a split of assets between spouses?
The following 4-step approach is applied by the Court:
1. Ascertain the current assets, superannuation, liabilities and financial resources of the parties
2. Assess the contributions (financial, non-financial, homemaking and parenting) of the parties at the commencement of, during and after their relationship
3. Assess the future needs of the parties (for example, who might have the care of infant children, any difference in the parties’ income earning capacities, the age and state of health of the parties)
4. Consider whether the proposed orders are just and equitable in all of the circumstances
What impact does it have?
How an inheritance is dealt with in the event of separation will generally involve consideration of the following:
• The timing and the length of the relationship
• The amount received
• How it was applied
• The financial circumstances of the parties at the time of the Court’s decision
The timing of the inheritance is important. For example, if a party received their inheritance in the early years of a 25-year relationship then depending upon the amount and how it was applied, the inheritance may not result in a significantly higher contributions assessment to the party who received it. This is because often during long relationships each spouse makes various financial, non-financial, homemaking and parenting contributions which can offset a financial contribution by way of an inheritance.
Conversely, if the inheritance was received late in the relationship or after separation or the parties were in a short-term relationship, then the party who received it will likely receive a higher contributions assessment.
The amount received will affect the Court’s ultimate determination. If modest in light of the parties’ combined net assets (for example a $50,000 inheritance compared to net assets of $1.5 million) then this may have little effect on the Court’s assessment of contributions. However, if the inheritance comprised $1 million of a $1.5 million property pool, then it is highly likely the contributions would be assessed in favour of the spouse who received the inheritance.
It will also be relevant for the Court to consider how the inheritance was applied. If it was used to fund family holidays or extravagant purchases and is no longer represented in the parties’ net assets, then it will carry less weight when assessing contributions compared to an inheritance which was used to purchase a family home or investment property, establish a share portfolio or contribute to superannuation and that asset/s still exists at the time of determination. It may also be relevant in the Court’s determination if the inherited funds are kept separate and not otherwise intermingled with the parties’ joint assets.
The financial circumstances of the parties at the time of any determination is also a relevant consideration, particularly if a spouse has received an inheritance following separation. For example, if the parties had net assets of $1 million and there was a post-separation inheritance of $500,000, a Court would not likely consider it just and equitable if one spouse received total net assets of $500,000 and the other spouse received the remainder plus the inheritance (total assets of $1,000,000). In that instance the Court may consider awarding the spouse without the inheritance a larger percentage of the net assets.
What if you are a beneficiary under a Will or Estate but the testator has not yet passed away?
This question often arises when a party or their spouse has a parent who is elderly or unwell. A future inheritance will generally only be taken into account by the Court if the testator’s death is imminent and there is evidence of that (for example, a medical report) and what entitlement the spouse might have in the testator’s estate. In that instance, the inheritance cannot be included in the assets to be divided between the parties but the Court can consider it at step 3 of the 4-step process in assessing the parties’ future needs.
How can an inheritance be protected?
As between spouses, the only way to protect an inheritance in the event of separation is to enter into a Financial Agreement pursuant to the Family Law Act 1975 (Cth). For a Financial Agreement to be binding it must meet specific requirements set out in the legislation, including that before signing the Agreement each party to the Agreement obtain independent legal advice as to:
• The effect of the agreement on the rights of that party; and
• The advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement
The terms of a Financial Agreement are tailored according to the individual circumstances of the case and most importantly, what agreement can be reached between the parties. A Financial Agreement can be entered into before, during or after a marriage or de facto relationship. Some options for a Financial Agreement are:
• Any assets (including an inheritance) a party has at the commencement of their relationship are excluded from any division of assets between them;
• Any assets (including an inheritance) a party acquires in their sole name during the relationship are excluded from any division of assets between them;
• Any inheritance received by a party is excluded in its’ entirety; or
• The Agreement specifies what portion of that inheritance the other spouse receives in the event of separation.
If you and your spouse have separated and there is the possibility you might receive an inheritance into the future it is important to finalise your property/financial settlement with your spouse as soon as possible (and before the death of the testator) and have any agreement reached formally documented in either Consent Orders filed in the Family Court of Australia or in a Financial Agreement. Provided your agreement is formally documented and there are no other grounds (such as fraud) on which the Order or Agreement can be set aside, then your spouse cannot later claim they are entitled to receive any portion of an inheritance you might receive into the future.
If a testator is concerned about whether any gift they leave to a beneficiary will be attacked in family law proceedings, then the testator might wish to consider whether there are any asset protection options available to them and make any changes to their Will and estate planning while they still have capacity to do so.