The Federal Circuit Court and Family Court of Australia can treat inheritances in various ways when determining property division.
The Court has two major factors to consider in respect of an inheritance:
- The timing of when the inheritance was received; and
- Whether the inheritance was intermingled with other property in the asset pool.
Timing
The timing of when an inheritance is received can influence how it is considered in a property settlement. For instance, if the inheritance was acquired before the relationship or at the beginning of it, it will be assessed as an initial financial contribution on behalf of at party.
The weight of that contribution depends largely on the size of the inheritance against the length of the relationship and considered in conjunction with other contributions, both financial and non-financial, of the parties throughout the relationship.
Parties who receive an inheritance post-separation, or close to separation, often seek that the inheritance is ‘excluded’ or ‘quarantined’ from the asset pool being divided.
As the Court is required to consider all of the parties’ legal and equitable interests in property when making a property settlement order, these inheritances cannot be excluded.
The Court however has a discretion to consider the inheritance as a separate pool of property to the other items of property, often referred as a ” two-pool approach”. This is likely to happen when an inheritance is received late in the relationship or post separation where a party can prove no contribution was made by the other party to the inheritance and it would be unjust for the same to be included in the one asset pool.
As the Federal Circuit and Family Court of Australia is a discretionary jurisdiction, the Judge can decide on the circumstance of the individual case as to whether a global (one pool) approach will be taken or a separate pool approach is the more sensible pathway.
If a party is expecting an inheritance upon the death of a family member, this is not taken into consideration in a property settlement as the inheritance has not yet been received, and the testator can alter their Will before their death. However, there are some exceptions to this in limited circumstances where there is a nexus between the other party and the inheritance or where the inheritance is “sufficiently proximate”. For example, when the testator is close to death or has lost capacity and unable to change their Will.
In the case of Moritzen & Mortizen [2018] FamCAFC 198, the wife was to receive a $850,000 inheritance under her mother’s will. The Wife’s mother was 99 years old and in ill health. The husband made no contribution to the inheritance that was to be received by the Wife.
The matrimonial asset pool was found to be $2,267,245. When considering the prospective inheritance, the primary judge found the inheritance to be “sufficiently proximate” to be included in the asset pool and found it just and equitable to make a 5% adjustment to the husband on future needs as the Wife had a future financial resource. The primary judge 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.
Use and commingling of Inherited Assets
The use and commingling of inherited assets during the marriage can significantly affect their treatment in a property settlement. Commingling refers to the act of mixing or blending trust or inherited assets with other assets, such as personal funds or marital property. This can complicate the distinction between separate and marital property, making it harder to identify the original source of the assets.
If inherited funds were utilised for joint family expenses, such as improving the family home or financing family vacations, the party who received the inheritance will be seen to have made a greater contribution to the asset pool.
For example, in Muir & Royston [2010] FamCA 374 the parties were married for 27 years with two adult children. The Court adopted a three-pool approach as follows:
Pool 1 –inheritances of $2.5 million from the husband’s parents and other family
Pool 2 – inheritances of $44,000 from the wife’s family
Pool 3 – remaining net assets valued at $5 million.
The husband argued contributions as to 100% in his favour for Pool 1, 100% of Pool 2 for the wife, and 55/45 of Pool 3 in his favour.
O’Reilly J described a key factual issue as follows:
[81] “whether the items the husband seeks to have ‘quarantined’ in category 1 were the subject of discrete or mixed accounting by him and in particular whether any ‘matrimonial’ income as opposed to income derived from assets sourced from his parents found its way into the assets…in…category 1.”The wife argued she made a significant contribution to Pool 1 by her “increased” homemaker role allowing the husband to spend greater time on the accounts and management of the money received from his family.
The Court ultimately found that 25% of Pool 1 as having come “into the husband’s hands for his own unqualified use very late in the parties’ marriage” without any contribution in respect of it by the wife. The Court assessed Pool 1 as to a 30% contribution by the wife, and 70% by the husband, to account for these funds being made available over many years by income splitting through a trust.
In respect of Pool 2, the wife’s contributions were assessed as 100% noting the inheritance of her family.
In respect of Pool 3, contributions were assessed as 47.5% to the wife.
There was an adjustment for s.75(2) factors of 3% of the total pool to the wife, which brought the overall settlement to 55 % to the husband and 45 % to the wife of the aggregate pool.
Summary
In summary, the treatment of inheritances in property settlements can be a complex issue, influenced by a myriad of factors.
Understanding these complexities can provide individuals with the knowledge they need to navigate their property settlement effectively.
If you have separated and are negotiating a property settlement where an inheritance is involved, contacting Dorter Family Lawyers and Mediators to obtain expert advice about your specific circumstance is essential.
Contact Dorter Family Lawyers and Mediators for clarity about your financial settlement to secure your financial future.