It is not uncommon in a relationship, whether marital or de facto, for a party to the relationship to receive the benefit of an inheritance at some stage in the relationship. The inheritance may then be utilised to benefit both parties and it can often provide much needed financial assistance to help the couple acquire significant assets such as a family home or investment property.
But what happens if the parties end the relationship?
The issue of how such an inheritance is dealt with upon separation often results in bitter disputes between the parties. This is due to the common misconception that the inheritance falls into a separate protected category of asset and remains outside of the asset pool available for distribution.
Parts VIII and VIIIAB of the Family Law Act 1975 provide for the division of the property of parties to a marriage and de facto relationship.
Section 44(3) of the Family Law Act 1975 provides a time limit of 12 months from the date of a divorce order becoming absolute for bringing property proceedings.
There is a well-established four step process undertaken by the Court in determining property settlement calculation:
- Identifying and valuing the net property of the parties;
- Assessing the financial and non-financial contributions of the parties;
- Considering the future needs of the parties; and
- Considering whether the orders proposed are just and equitable.
The question of whether inheritances should be treated different from other property was addressed in the case of Bonnici and Bonnici (1991) FamLC where the Full Court of the Family Court found that
“… a property does not fall into a protected category merely because it is an inheritance”
and that the answer will “depend on the circumstances of individual cases.” The inheritance will usually be considered as a contribution made by the recipient and otherwise will not be excluded from the asset pool. The individual facts and circumstances of each case must be taken into account. The factors to be considered relate to the timing of the receipt of the inheritance and the impact the inheritance has on the size of the asset pool.
Timing of Inheritance
Where an inheritance is received by a party prior to or at the beginning of a relationship it will usually be considered as an initial contribution of that party. Over time, the impact of the inheritance will lessen as a consequence of the other spouse’s contribution and it may have limited impact on a party’s entitlement.
If the inheritance is received by a party during the relationship and applied for the benefit of both parties, the inheritance will likely be considered a financial contribution to the joint assets by the receiving party.
Where the inheritance is received late in the relationship or post separation, except in unusual circumstances, the non-receiving party would find it difficult to establish that they have contributed towards the inheritance received. As such, it may be possible for a late inheritance to be quarantined from the asset pool, or for two separate pools to be established with differing splits in the pools based on contributions.
Size of Asset Pool
The size of the asset pool available for distribution can have a significant effect on the way an inheritance is treated in a property settlement notwithstanding the timing of the inheritance.
Where the asset pool available for distribution is limited in comparison to the amount of the inheritance and excluding the inheritance from the asset pool would result in an unjust and or inequitable division of the asset pool, even a late inheritance may form part of the asset pool for distribution. The Court is afforded a wide discretion in this regard.
In Bonnici and Bonnici, the Court stated that “if there are ample funds from which an appropriate property settlement can be made, and the just result arrived at, then the fact of a recently acquired inheritance would normally be treated as an entitlement of the party in question.”
However, the inheritance received by the husband in Bonnici and Bonnici (1992) FLC formed a significant portion of the total asset pool of the parties. The Court considered and was satisfied that the wife’s contributions as parent and homemaker were such that it was just and equitable for an adjustment to be made for her contributions taking into account the inheritance received by the husband. If the asset pool excluding the inheritance had been significant enough to satisfy the entitlements of the wife, then the recently acquired inheritance of the husband likely would have been treated as an entitlement of the husband.
As set out above, the individual circumstances will be considered in determining whether or not and the extent to which an inheritance forms part of the asset pool for a property settlement.
If you have any questions on the above please contact Shire Legal on 9526 3444 to book an appointment with one of our solicitors.