Inheritances and Property Settlements

If you receive an inheritance before, during or after a relationship, an obvious question is whether you have to share it with your former partner.

There is no simple yes or no answer.

An inheritance is not automatically protected from a property settlement. Equally, receiving an inheritance does not mean that your former partner is entitled to half of it.

The Four-Step Approach

The Court will approach the issue of an inheritance through the same four-step process applied in property settlement proceedings, namely to:

1.     Identify and value the parties’ property, liabilities and financial resources at the time of hearing;

2.     Identify and assess the parties’ contributions (expressed as a percentage);

3.     Determine whether any adjustment should be made on account of the parties’ current and future circumstances; and

4.     Effectively “step back” and determine whether an order would be just and equitable.

Upon this assessment, the Court will usually arrive at a determination of the parties’ entitlements expressed as a percentage of the overall pool (a global approach) or in relation to individual assets (an asset-by-asset approach).

As will be seen, the issue of an inheritance will be relevant throughout the four-step process.

Inheritances received during a relationship

Inheritances received before or during a relationship are generally treated as contributions made by or on behalf of the person receiving them, unless there is a clear intention that the inheritance was provided for both parties’ benefit.

The weight given to an inheritance as a contribution will largely depend on its size, the duration of the relationship and the other contributions made by the parties.

As stated in Quaresmini & Quaresmini [1999] FamCA 1314 [39], in relation to contributions generally:

“There is no principle that the length of the marriage leads to a likelihood that other contributions will outweigh or weigh equally with ‘a particular contribution’. It is a matter of assessing the contributions of all relevant kinds in each case to arrive at an outcome which is both appropriate and just and equitable. In some cases, particular contributions may be outweighed or equalled by other ones.

In other cases, particular contributions may be so disproportionate to other contributions as to merit special recognition.”

Consider, for example, the different approach the Court might take to a $1 million inheritance in a five-year relationship compared with a $10,000 inheritance in a 20-year relationship.

Take the matter of Sinclair & Sinclair [2012] FamCA 388. The parties had approximately $7.3 million in assets, most, if not all, of which had been contributed by the wife, who received them from her father many years earlier.

The primary judge concluded that about three-quarters of the pool was unrelated to the direct contributions of the parties themselves, excluding the inheritance received by the wife. He found that the parties had contributed equally to the remaining quarter.

The husband's contributions-based entitlements were therefore assessed at 12.5% of the pool ($912,500).

When considering the parties' current and future circumstances, the judge noted that the husband's standard of living would significantly diminish if he received only his contributions-based entitlements. He therefore made a further cash adjustment of $200,000 to allow the husband to secure housing and obtain an income stream.

In contrast, in Elgin & Elgin [2014] FamCA 10, the primary judge gave no special weight to an inheritance of $1.3 million received by the wife 10 years before separation, dividing the pool equally in the context of a 40-year marriage and a $44 million asset pool.

Inheritances received after separation

Parties who receive an inheritance after separation will often speak of “quarantining” or “excluding” it from the asset pool.

These descriptions are misleading, as the first step of the property settlement process requires the Court to identify the parties' existing legal and equitable interests in property under s 79(3) of the Family Law Act 1975 (Cth) (the Act).

This language generally refers to the determination of the parties' entitlements following the four-step process.

The Court will ordinarily apply a two-pool approach — treating the inheritance separately from the remainder of the asset pool — unless the other party can be shown to have contributed to it or the circumstances would make this approach unjust.

As stated in Bonnici & Bonnici [1991] FamCA 86 [41]-[44]:

“[41] The more difficult issue in this case is as to whether the same should be treated differently from other types of property in which the parties clearly have an interest.

[42] The answer, we consider, must depend upon the circumstances of individual cases. If, for example, in the present case, there had been no other assets than the husband’s inheritance, but the wife had, as his Honour found, clearly carried the main financial burden in the support of a family and also performed a more substantial role as a homemaker and parent than the husband, then it would clearly be open and indeed incumbent upon a Court to make a property settlement in her favour from such an inheritance.

[43] A property does not fall into a protected category merely because it is an inheritance. On the other hand, if there are ample funds from which an appropriate property settlement can be made and a just result arrived at, then the fact of a recently acquired inheritance would normally be treated as an entitlement of the party in question.

[44] The other party cannot be regarded as contributing significantly to an inheritance received very late in the relationship and certainly not after it has terminated, except in very unusual circumstances. Such circumstances might include the care of the testator prior to death by the husband or wife as the case may be or other particular services to protect a property…”

The application of a two-pool approach to inheritances may result in an adjustment to the other party from the remaining assets on account of the parties' current and future circumstances under s 79(5) of the Act, depending on the significance of the inheritance compared with the remainder of the pool.

These adjustments will typically be dealt with generally as a percentage rather than through a mathematical exercise.

In Elgabri & Elgabri [2009] FamCA 227, the husband received a $527,000 inheritance from his uncle late in the marriage. The funds were left untouched in a bank account, and the wife made no contribution to them.

The primary judge applied a two-pool approach, separating the husband's inheritance ($527,000) from the remainder of the asset pool ($826,072). He found the parties' contributions to the remaining pool to be equal, before making a 7.5% adjustment ($61,955) to the wife on account of the husband's inheritance and the parties' current and future circumstances.

An example of where the Court considered a two-pool approach to be unjust is Schirmer & Sharpe [2005] FamCA 40.

At separation, the parties had an asset pool of approximately $9,000. The wife subsequently inherited two properties from her parents, one worth approximately $560,000 and the other producing net sale proceeds of approximately $200,000.

The matrimonial asset pool was found to be $841,479 at trial.

In the context of a nine-year relationship, four children, a small asset pool and very significant financial contributions from the wife's parents throughout the marriage (including allowing the parties to live rent-free), the primary judge assessed contributions at 90:10 in favour of the wife.

The judge made a further adjustment of 2.5% to the husband on account of the parties' current and future circumstances. The husband therefore received 12.5% of the pool ($105,184).

This decision was upheld on appeal.

Prospective inheritances

It is common for parties to argue that their former partner's expected inheritance should be considered as part of a property settlement.

An expectation of inheritance will not ordinarily constitute property or a financial resource where the prospective beneficiary has no enforceable right to prevent the testator from changing their will.

As stated in Tulloch & White [1995] FamCA 127 [25]:

“[25] …In our view, such an expectancy could not be said to be a financial resource, that term connotating some degree of entitlement to, or control over, or relative certainty of receipt of property. In this context we refer to the submissions of Mr Rose which pointed out that a will is a mere express of intention at the time that it is made and may be freely revoked or altered… and that it has no legal effect until the death of the testator.

A prospective inheritance may nevertheless be relevant to the assessment of the parties' current and future circumstances under [s 79(5)] of the Act, particularly where there is a connection between the other party and the inheritance or where its receipt is sufficiently proximate (for example, where the testator is close to death or has lost capacity).”

An example of the Court identifying a connection between the other party and the prospective inheritance is De Angelis & De Angelis [1999] FamCA 1609.

During the marriage, the wife's parents sold their home in Sutherland to the wife's brother at a substantial undervalue ($28,000) and purchased a property at Vincentia.

They promised to sell the Vincentia property to the parties for the same price. Relying on this promise, the husband undertook significant work and maintenance on the Vincentia property.

Following separation, the wife moved into the Vincentia property. Her mother subsequently moved into a nursing home, while the wife remained in the property rent-free.

The mother's will left her entire estate to the wife. At the time of the final hearing, the mother was elderly and exhibiting cognitive decline.

The wife also stood to inherit a property at Sutherland from her aunt. The husband had spent many years maintaining and improving this property while the parties were together.

At the time of the final hearing, the aunt was 90 years old, living in a nursing home and suffering from dementia.

The husband had therefore made contributions towards both properties which were expected to form part of the wife's inheritances.

The trial judge assessed the husband's and wife's contributions at 55:45 respectively, before making a further adjustment of 10% to the husband on account of the wife's prospective inheritances and the parties' current and future circumstances.

The husband therefore received 65% of a $530,400 asset pool ($344,760), excluding the prospective inheritances.

This aspect of the decision was upheld on appeal.

In Moritzen & Moritzen [2018] FamCAFC 198, the wife expected to receive an inheritance of $850,000 under her mother's will. Her mother was 99 years old and in poor health.

The matrimonial asset pool was $2,267,245. The husband's and wife's contributions-based entitlements were assessed at 42:58 respectively.

The primary judge considered the inheritance sufficiently proximate to be relevant, making a 5% adjustment ($113,362) to the husband on account of the parties' current and future circumstances.

The judge concluded that the prospective inheritance only needed to be considered in a general way rather than through a mathematical calculation.

These findings were upheld on appeal.

Adjournments pending an inheritance

Where the receipt of an inheritance is imminent, it may be possible for the Court to adjourn property settlement proceedings under s 79AA(5) of the Act until the estate has been administered.

An example is Grace & Grace [1997] FamCA 59.

The wife successfully appealed to obtain an adjournment of the property settlement proceedings until the husband's interest in a testamentary trust vested or his mother died, whichever occurred first. At that point, he would realise a remainder interest in the estate.

Similarly, in Rogan & Rogan [2007] FMCAFam 1044, the Court observed that an adjournment may allow a prospective inheritance to crystallise, assisting in its valuation and in assessing the parties' current and future circumstances.

Key principles

The treatment of inheritances in family law property settlements is highly discretionary. Each case will largely depend on its facts.

However, four general conclusions can be drawn:

1.     An inheritance received during a relationship will ordinarily be regarded as a financial contribution by the party who receives it.

2.     A post-separation inheritance will usually result in a two-pool approach being applied by the Court unless there is a connection between the inheritance and the other party or the result would be unjust.

3.     The application of a two-pool approach may result in an adjustment to the other party on account of the parties' current and future circumstances, depending on the size of the inheritance compared with the remainder of the asset pool.

4.     A prospective inheritance will not ordinarily be considered unless there is a connection between it and the other party or its receipt is sufficiently proximate. Other relevant considerations include the size and timing of the prospective inheritance, the other party's contributions, the circumstances of the testator and any potential family provision claims.

Oliver Lacey is the Director of Doolan Lacey Family Lawyers and an Accredited Specialist in Family Law.