Treatment of a Large Inheritance in a Property Settlement

During the course of a marriage or de facto relationship, it is not uncommon for one of the spouses to receive an inheritance. What should happen to that inheritance if the parties separate, and is it fair for the other spouse to receive some benefit from it in the couple’s property settlement?

Inheritance received during or after the relationship

In cases where inheritance is received by one spouse, it is not uncommon for the spouse who was the recipient of the inheritance to argue that the financial benefit was only intended for them and not the other party when it comes time to divide the assets.

A Court will always consider this argument on a case by case basis.

A court may need to consider whether to take a global approach and include the inheritance in the pool available for distribution or an asset by asset approach where the inheritance is excluded from the pool and quarantined from distribution. Generally speaking, any inheritance that has been received by a spouse early in the relationship will be included in the property pool and will be considered as part of that spouse’s financial contribution. There are exceptions, though.

In many cases, inheritances acquired post-separation are kept separate to the property pool and only assets acquired jointly during the marriage are included in the pool for distribution. The inheritance is then treated as a financial resource available to the receiving party so that they may then have an adjustment made against them in the distribution of the property pool, although it will not be on a dollar for dollar basis.

If a court determines that the property pool should comprise all assets(including windfalls), the beneficiary of the inheritance should get the benefit of making a more significant financial contribution to the asset pool than the other party.

A court will also consider any contributions by a spouse’s parent towards the purchase or improvement of the matrimonial home (such as a house deposit or funds to pay for renovations) as an indirect contribution by that spouse unless there is evidence to suggest that the parent intended for it to be a contribution for both spouses.

What about prospective inheritance?

Prospective inheritance refers to any entitlement a spouse is to receive upon the death of their parent(s). In property settlement cases, where the parent(s) is not yet deceased, the inheritance cannot form part of the property pool if the parent has the capacity to change their will. However, the proposed entitlement may be taken into consideration when determining the percentage apportionment of the couple’s existing property.

As an example, if one party is an only child, and their mother is deceased, and their father is elderly, they are likely to inherit their father’s house, any investment properties and cash/shares or super when he dies. Therefore this prospective inheritance may be taken into consideration when dividing up the couple’s assets.

The factors the court will consider where a prospective inheritance is concerned are each spouse’s financial and non-financial contributions to the relationship, their contributions to the welfare of the family as well as their future needs and the likelihood of the parent(s) changing their Will.

Inheritance from other people

The court will also take into consideration an inheritance received by a party from someone other than a parent. In one case, the husband’s new wife was terminally ill and had less than two years to live. The husband was likely to continue living in his new wife’s home after she had died. The court found that this home formed a valuable financial resource and therefore made a percentage adjustment in his former wife’s favour.

You should not automatically assume that your property settlement will be a clear 50/50 division or that your contribution during the relationship will be fully reflected in a monetary value when that relationship dissolves. For advice on property settlements and how your inheritance may affect your contribution, contact our family lawyers in Cairns now.