There is no ‘one rule fits all’ situation when it comes to dealing with inheritance in divorce proceedings. There is a wide discretionary area for judges when dealing with matters of property. In a property settlement, the particular circumstances of each case determine how an inheritance is dealt with. What the deceased intended when they made bequests in their will is one of the factors that decide if an inheritance is protected from distribution or forms part of an asset pool.
Divorce and Inheritance Laws
Inheritances can be divided while your divorce is being processed. When asking if you can lose your inheritance during divorce settlement proceedings, consider:
- When you received the inheritance.
- The recipient of the inheritance.
- The length of the relationship.
- The contributions made during your partnership, and by whom.
- What the inheritance was worth, and how it relates to the complete asset pool.
These factors will help determine if the inheritance should remain with the recipient or be divided between both parties upon divorce.
Whether or not an inheritance is included in the divorce depends on:
- How long the relationship lasted.
- Whether both parties contributed to the purchase or upkeep of a property with the inheritance.
- Whether the value of the inheritance was minor in comparison to the equity accumulated over the years.
Timeframe Of Inheritance
When an inheritance is received makes a difference. An inheritance received at the beginning of a relationship would be deemed an initial contribution from the individual. As such, its value would not be deducted from the asset pool, although it would be taken into account when deciding entitlements in the event of a separation. The size of any adjusting impact to an individual’s entitlements will depend on how much each party contributed to the asset pool.
How inheritances received during a relationship depend on what the benefactor intended and how the finances were applied. For example, money spent on everyday expenses or improving the family home would generally be considered a financial contribution made by the person receiving the inheritance.
An inheritance comes about after separating or in the latter stages of a relationship. It is less likely to be considered a contribution and may be protected from a distribution between the couple.
What Were The Benefactor’s Intentions?
If the benefactor had specific intentions concerning the inheritance, those intentions might sway its treatment. For example, where the deceased was clear about the whole family benefiting from the inheritance, it is likely to be deemed a part of the asset pool. Alternatively, they may have intended and made the bequest out to a particular person for a specific purpose. In that case, the money is likely to have been kept separate from the total assets and considered separate.
If the beneficiary’s spouse helped care for the deceased, perhaps a parent living with them, any inheritance would likely be considered as belonging to the whole family.
Asset Pool Size
A large inheritance received toward the latter period of a relationship may be treated as part of a small asset pool, especially if dividing the asset pool less the inheritance would cause an unjust settlement.
Property Settlement Through Court
Resolving divorce settlement issues outside of the courts is always the preferred method. Family dispute resolution or negotiating directly through solicitors can help achieve such a resolution. Unfortunately, it isn’t always possible to sort things out without applying to the Federal Circuit Court for property orders. If one needs to apply for property orders, they must do so no longer than 12 months after their divorce becomes final or within two years after a de facto couple separates.
Protecting Your Assets
If you’re still with your spouse or de facto partner when they die, there are some things you can put in place to protect your assets. Signing a financial agreement is the best form of protection. Also known as prenups, or prenuptials, financial agreements can be drawn up before, during or after de facto relationships or marriages in Australia. Agreements can be sorted out to separate assets built up through the course of the relationship from any inheritance. While financial agreements are the best form of protection available to safeguard your inheritance, there is a possibility they can be set aside in the future.
The family law court could do a couple of things to protect your inheritance if you have separated from your partner.
- Quarantining the inheritance ensures that the spouse receiving the inheritance keeps it along with their share of the combined contributions and future needs.
- Including the inheritance into the asset pool, which will be divided between the parties. To do this, the court considers the inheritance as a contribution by the person receiving it unless there are unusual circumstances. However, the court will not reimburse them the entire amount of the inheritance, dollar for dollar. They may receive a more significant portion of the asset pool reflecting their inheritance as a contribution.
The court can choose either approach, regardless of when the inheritance was received. Quarantining the inheritance is typically only adopted when the inheritance arrived before or after the couple separated. You can also self-quarantine your own assets by depositing inherited cash into a bank account solely your own and keep it separate from your remaining assets. For example, if your inheritance is a house, make sure you repay the mortgage or renovate the property yourself, without any contributions from your spouse. Otherwise, your spouse can argue that the asset pool, including an inheritance, should be added to the other assets accumulated during the partnership.
If one receives an inheritance within the first several years of a long partnership, including the inheritance in the asset pool is the more likely approach, especially as it could be absorbed over the years by the contributions of the partner.
Avoiding Inheritance Arguments
You can avoid arguments over inheritance by ensuring your property settlement is legally binding and drawn up as quickly as possible following separation. For example, a post-separation inheritance could be included in the asset pool and end up divided between both parties. The person in receipt of the inheritance would be credited for the contribution, but if they had organised their financial situation beforehand, they might have retained the whole for themselves.
Good estate planning from the person you expect to receive an inheritance from can wipe out any arguments completely with a testamentary trust. This would necessitate that person obtaining quality planning advice.
Divorce and inheritance don’t always work well together. In fact, they can create conflict when it comes to dividing marital assets, particularly if your former partner disputes the importance of your divorce and inheritance. Consult a family lawyer specialising in divorce to ensure things run smoothly.
Frequently Asked Questions About Inheritance and Divorce
1. What are Marital Assets?
Answer: Marital assets are the types of things that accumulate during a marriage-style relationship. They include any property, belonging, or money in both partners’ names, either of their names or under either of their control.
2. Does My Ex-Spouse Have Any Rights to My Inheritance?
Answer: That is something that has to be determined by the courts. Your former partner may propose that the inheritance benefited both of you and that excluding it from the divorce settlement would be unfair to them. In Australia, inheritance and divorce are usually dealt with in the family court.
3. What are Consent Orders?
Answer: Consent orders are legally binding agreements approved by the court after negotiation between both parties. They are the next best way for former spouses to reach an agreement on the division of any inheritance in the divorce settlement when they cannot agree on their own. The couple applies for consent orders from the family court to formalise the agreement.