Families and money can sometimes be a volatile combination. This can be complicated especially in circumstances where a divorce or separation occurs and a new Will isn’t drafted to reflect the change of circumstances. In this blog, we review what it means to have an inheritance included in the asset pool of a separating couple.
Why is inheritance an asset?
When a separating couple needs to divide their assets, they must first work out the pool of net assets available for distribution. The pool includes all the assets and liabilities in each person’s name and in the parties’ joint names, as well as each person’s share of an asset owned jointly with another person.
If one person received an inheritance before or during the relationship, that inheritance would normally form part of the pool of assets available for distribution.
Does that mean my partner gets half my inheritance?
No, not necessarily. Just because an asset is included in the pool of assets available for distribution does not mean that the asset or the whole pool will be divided 50/50. Each matter is considered on a case-by-case basis.
Importantly, once the parties have identified what is in the pool of net assets, they must then consider what contributions they each made, and their respective future needs, in order to determine their respective entitlements and percentage split of the net assets they will each receive.
What are contributions?
When working out which party made what contribution, the Family Court considers the parties’ financial contributions – i.e., who earned what, the lump sums expended during the relationship, who bought what and who paid for what – and also non-financial contributions – such as being a homemaker and parent, physically renovating a home or landscaping a garden, managing the parties’ financial affairs, etc.
After a long relationship where there haven’t been any significant inheritances or other financial windfalls, a court usually finds that financial and non-financial contributions during the relationship are roughly equal, unless special circumstances apply.
An inheritance received by one party before the commencement of the relationship would be treated as an initial financial contribution by that person – i.e., money or assets that person brought into the relationship. Similarly, an inheritance received by one partner during the relationship is usually considered to be a financial contribution by that person.
In these circumstances, depending on factors such as the size of the inheritance, when it was received, what it was used for and the parties’ other contributions, this would generally mean that the person who received the inheritance would be treated as having made greater contributions during the relationship.
What about an inheritance received after separation?
This situation is less clear cut. A court usually considers an inheritance by one party as a sole contribution by that person. Generally, this will usually mean that the other party did not contribute to the post-separation inheritance and it should not be included in the pool of assets to be divided. However, each matter is dealt with on a case-by-case basis and while this may be a potential result, it is always dependent on the facts of the case and the circumstances of the lead up to the inheritance.
For example, if the post-separation inheritance had been received from the husband’s mother and the wife had a close relationship with her mother-in-law and had cared for her during an illness, a court might find that both parties had contributed to the receipt of the inheritance and therefore both parties will be entitled to a share of the inheritance.
After working out financial and non-financial contributions, the future needs of the parties are assessed before determining a split of the net assets and whether any adjustments should be made in favour of the party in need. Future needs include things like income, earning capacity, financial resources, ongoing care of children, age, health, etc.
An inheritance, even one received after separation, may be taken into account in this final step. The reason for this is the recipient of the inheritance would have greater financial resources and may be receiving income from an inherited investment which may well mean that person’s future financial circumstances may significantly outweigh the other person. In such a case, a court may rebalance the division of the net asset pool in favour of the other partner by way of an adjustment which is derived from section 75(2) of the Family Law Act (Cth).
An inheritance received before or during a relationship will almost always be treated as an asset available for distribution between separating parties, whereas an inheritance received after separation will usually be found not to fall into the main pool of assets but may be treated in a separate pool. However, that does not necessarily mean that the other person is entitled to half the inheritance.
The receipt of a large inheritance will almost always have a significant impact towards the determination of contribution of the parties. In addition, an inheritance, including one received after separation, could have an impact on the determination of future needs of the parties and whether any adjustments ought to be made.
Finally, once the parties have been assessed as to the net assets, what contributions were made, whether there are future needs, a court is then required to determine whether the proposed split of net assets is just and equitable.
The Family Law team at Etheringtons Solicitors are skilled at handling all matters relating to inheritances and are able to assist with complex cases in the event of a relationship breakdown. If you need assistance with any area of Family Law, do not hesitate to contact us on 9963 9800 or via our contact form here.