What you need to know about Inheritances and Family Law Property Settlements
In 2018, more than $120 billion was passed on to younger Australians in wealth transfers – 90% of this occurring through inheritances – with this amount expected to quadruple between now and 2050, according to the Productivity Commission in 2021. It is perhaps unsurprising, then, that the issue of inheritances is a cause of anxiety for family law clients, particularly where there may be an emotional connection between an inheritance and the death of a loved one.
The purpose of this article is to address some of those anxieties by explaining how inheritances are dealt with in a family law context, with a particular focus on inheritances received during a relationship and post-separation together with the issue of prospective inheritances.
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:
- identify and value the parties’ property, liabilities and financial resources at the time of hearing;
- identify and assess the parties’ contributions (expressed as a percentage);
- determine whether any adjustment should be made on account of the parties’ future needs; and
- 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.
During the 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 that will be given to an inheritance as a contribution will largely be determined by its size, the duration of the relationship and the myriad of 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 attitude the Court might have to a $1,000,000 inheritance in a five-year relationship as compared to a $10,000 inheritance in a 20-year relationship.
Take, for instance, the matter of Sinclair & Sinclair [2012] FamCA 388. The parties had approximately $7.3 million of assets, most, if not all of which, was contributed by the wife who had received it from her father many years before.
The primary judge concluded that about three-quarters of the pool was unrelated to the direct contributions (excluding the inheritance received by the wife) of the parties themselves and that they contributed equally to the remaining quarter. He therefore assessed the husband’s contributions-based entitlements at 12.5% of the pool ($912,500). When considering future needs, he noted that the husband’s standard of living would significantly diminish if left with only his contributions-based entitlements and therefore made a cash adjustment to him of $200,000 to allow him to secure his housing and obtain an income stream in the years ahead.
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.
Post-Separation
Parties who receive an inheritance post-separation will often speak of “quarantining” or “excluding” it from the asset pool. These descriptors are misleading as the first step of the process and subs 79(1) of the Family Law Act 1975 (Cth) (the Act) expressly requires the Court to consider all of the parties’ existing legal and equitable interests in the property when making a property settlement order.
This language is generally a reference to the determination of the parties’ entitlements following the application of the four-step process. After doing so, the Court will ordinarily apply a two-pool approach – i.e., to treat the inheritance separately from the rest of the pool – unless the other party can be shown to have contributed to it or the circumstances of the parties would render this approach unjust. As stated in Bonnici & Bonnici [1991] FamCA 86:
“[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, however, may result in a “future needs” adjustment to the other party from the remaining assets under subs 75(2) of the Act depending on the significance of the inheritance in comparison to the remainder of the pool. It should be noted, however, that these adjustments will typically be dealt with generally as a percentage rather than on any mathematical exercise.
A case where the two-pool approach was applied was the case of Bishop & Bishop [2013] FamCAFC 138. Here, the wife received an inheritance of $250,000 from her aunt the year before her separation. The money was placed in a trust and the husband made no contributions to it.
The primary judge applied a three-pool approach, separating the matrimonial asset pool ($1,118,680) the inheritance ($250,000) and the parties’ superannuation ($131,157) into separate pools. In respect of the matrimonial asset pool, he found the contributions of the parties to be equal before making a 5% ($55,934) adjustment to the husband on account of the wife’s inheritance and superior superannuation. The Full Court upheld the primary judge’s findings in relation to the inheritance.
In Elgabri & Elgabri [2009] FamCA 227, the husband received a $527,000 inheritance late in the marriage from his uncle. The funds were left untouched in a bank account with the wife making no contribution to them.
The primary judge applied a two-pool approach, separating the husband’s inheritance ($527,000) from the rest of the pool ($826 072). He found their contributions to the remaining pool to be equal, making a 7.5% ($61,955) future needs adjustment to the wife on account of the husband’s inheritance.
An example of where the Court considered the two-pool approach to be unjust was the case of Schirmer & Sharpe [2005] FamCA 40. At the time of separation, the parties had an asset pool of around $9,000. The wife later received two properties from her parents as an inheritance, the first worth approximately $560,000 and the net sale proceeds of the second being approximately $200,000. The matrimonial asset pool was found to be $841,479 at the date of trial.
In the context of a nine-year relationship, four children, a small pool and very significant financial contributions from the wife’s parents throughout the marriage (allowing the parties to live rent-free), the primary judge made a contributions assessment of 90:10 in favour of the wife and a further future needs adjustment of 2.5% to the husband (i.e., the husband received 12.5% of the pool, being $105,184). This decision was upheld on appeal.
Expectancy of an Inheritance
It is common for parties to argue that their former spouses’ future inheritance should be considered as part of any property settlement.
An expectation of inheritance will not usually be sufficient to fall within the meaning of property or a financial resource where the potential beneficiary under a will has no enforceable right to stop the testator from altering their will. As stated in Tulloch & White [1995] FamCA 127:
“[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.”
An expectation, however, may be considered as a “future needs” factor under subs 75(2)(o) of the Act where there is a nexus between the other party and the inheritance or where the inheritance is “sufficiently proximate” (e.g., where the testator is close to death or has otherwise lost capacity).
An example of the Court identifying a nexus between the other party and the prospective inheritance was the case of De Angelis & De Angelis [1999] FamCA 1609. During the marriage, the wife’s parents sold their home in Sutherland grossly undervalue ($28,000) to the wife’s brother and bought a house at Vincentia. They promised the parties to sell the Vincentia property to them for the same price. On this promise, the husband undertook significant work and maintenance on the Vincentia property.
On separation, the wife moved into the Vincentia property. Shortly after, her mother moved into a nursing home. The wife remained in the Vincentia property where she lived rent-free. The mother’s will left the whole of her estate to the wife. At the time of final hearing, her mother was of advanced age and exhibiting cognitive decline.
The wife also stood to inherit a house in Sutherland from her aunt, who provided for her to receive it after many years of the husband maintaining and improving the property at a time where the parties were still together. At the time of final hearing, her aunt was in a nursing home, was 90 years’ old and suffered from dementia.
The trial judge assessed the husband and wife’s contributions as 55:45 respectively. He then made an adjustment of 10% to the husband, considering the wife’s expected inheritances as a future needs factor. The result of this was that the husband received 65% of a $530,400 pool ($344,760), excluding the expected inheritances. This aspect of the finding was upheld on appeal.
In Moritzen & Mortizen [2018] FamCAFC 198, the wife was to receive a $850,000 inheritance under her mother’s will. The mother was 99 years old and in poor health.
The matrimonial asset pool was found to be $2,267,245. The husband and wife’s contribution-based entitlements were found to be 42:58 respectively.
On assessment, the primary judge considered the inheritance to be “sufficiently proximate” to be considered, making a 5% adjustment ($113,362) to the husband on future needs. He concluded that he only needed to have regard to it in a general way and did not need to consider it on a mathematical analysis. His findings were upheld on appeal.
It is also possible, in circumstances where the receipt of an inheritance is imminent, for the Court to adjourn proceedings under subs 79(5) of the Act until such time as the estate has been administered. An example of an adjournment was the decision of Grace & Grace [1997] FamCA 59. Here, the wife was successful on appeal in obtaining an adjournment for her property settlement proceedings until the husband’s interest in a testamentary trust vested or his mother died (whichever was the earlier), upon which he would realise a remainder interest in the estate. Similarly, the Court commented in Rogan v Rogan [2007] FMCAFam 1044 that adjourning a matter can allow a prospective inheritance to crystallise to assist in the quantification of the inheritance as well subs 75(2) factors.
What you need to know about Inheritances in Family Law Matters
The issue of inheritances in family law matters is highly discretionary and each case will largely turn on its facts. In saying this, it is possible to draw the following four conclusions:
- an inheritance during a relationship will ordinarily be regarded as a financial contribution by the party who receives it;
- 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;
- the application of a two-pool approach may result in a “future needs” adjustment to the other party depending on the size of the inheritance; and
- a prospective inheritance will not ordinarily be considered unless there is a nexus between it and the other party or it is sufficiently proximate (e.g., the will cannot be altered). Other factors to be considered include the size of the prospective inheritance (in the context of the size of the matrimonial pool of assets), when the inheritance is likely to be received, whether a party has contributed to the prospective inheritance and any potential family provision claims that may be made.
If you are considering a separation or divorce or have a Family Law enquiry, please contact us on (02) 9437 0010 or email at enquiries@familylawyersdw.com.au to discuss your matter in complete confidence.
At Doolan Wagner Family Lawyers we specialise in complex family law matters and are conveniently located in St Leonards, on Sydney’s North Shore. We have a team of experienced and caring professional family lawyers available to help you with the complex emotional and financial challenges of separation and divorce.
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About the Authors:
Lisa Wagner
Managing Director and Principal of Doolan Wagner Family Lawyers. Lisa is an Accredited Family Law specialist holding honours degrees in economics and law. She is also a Collaboratively trained Family Lawyer, a Family Dispute Resolution Practitioner, and a Parenting Coordinator. Lisa has over 30 years’ experience as a specialist family lawyer, experienced litigator and skilful negotiator in all family law matters; working for the majority of that time in Sydney’s CBD as well as on Sydney’s lower North Shore and Northern Beaches.
Connect with Lisa on LinkedIn
Oliver Lacey
Born and raised in the Hunter Valley, Oliver studied a Bachelor of Arts/Bachelor of Laws at the University of Newcastle before being admitted as a solicitor in 2015.
After admission, Oliver worked at a leading CBD law firm where he specialised in commercial disputes involving equity, trusts, business valuations, complex corporate structures, insolvency, mortgages and commercial finance before transitioning these skills into family law.
With a special interest in high-value and complex property matters, Oliver applies a commercial mindset to financial disputes, priding himself on providing in-depth legal advice to achieve real world outcomes for clients. He opposes a “one-size fits all” mentality to family law, applying a tailored approach to meet his client’s needs, especially in matters involving children.
Whilst favouring early dispute resolution outside of Court, Oliver also has significant experience acting in matters involving significant interpersonal conflict and managing clients throughout this process.
Oliver is currently undertaking a Master of Applied Law (Family Law) at the College of Law.
Connect with Oliver on LinkedIn: linkedin.com/in/olaceydwfl
Stuart Colderick
Stuart holds a Bachelor of Laws and Bachelor of Arts from the University of New South Wales and has experience in a range of complex property and parenting matters both in documenting settlements and to final hearing stage.
Stuart’s meticulous eye for detail and ability to prioritise many competing tasks ensures that each of his clients receives prompt and considered advice. Stuart has a wealth of experience dealing with minority shareholder interests, business valuations and self-managed super funds. He thrives on the more complex financial situations and his clients respect his ability to understand and advise them in these areas.
A certified Parenting Coordinator as well as trained in Collaborative Practice, Stuart prioritises helping separating parties reach out of court settlements. However, he understands this isn’t always possible and is confident when taking your matter to Court. With a conscientious approach to family law, an empathetic nature and a maturity beyond his years, Stuart is the ideal lawyer for any family law situation.
We are confident you will find Stuart knowledgeable and approachable in all your dealings with him.
Connect with Stuart on LinkedIn:https://www.linkedin.com/in/stuart-colderick
Disclaimer:
These posts are only intended as an overview or comment on current issues that may interest you and are not legal advice. If there are any matters that you would like us to advise you on, then please contact us.
