Treatment of inheritance in family law matters is arguably one of the most contentious issues that can arise in a property settlement, and understandably so. The beneficiary party claims they are entitled to the whole of the inheritance, while the non-beneficiary party argues that the inheritance should form part of the asset pool (increasing that party’s share of the property settlement).
Where an inheritance has been received by a party – or will be received in the immediate future – the Family Court is required to consider it.
Contrary to popular belief, it does not fall into a special “protected” category simply because it is an inheritance. We explore how timing and the unique circumstances surrounding an inheritance can affect the Family Court’s treatment of it.
Back to basics
As discussed in our blog The “Four Step Process” – Property Settlement Part I, the Family Court follows four important steps to resolve disputes over property settlement:
- Identify and value the asset pool: assets, liabilities and resources of the parties;
- Consider the contributions of the parties made throughout the relationship;
- Consider the future needs of each party; and
- Determine whether the proposed settlement is just and equitable.
The timing of an inheritance is an important factor that must be addressed to determine whether it forms part of the asset pool for division at Step 1.
Inheritance received early in the relationship
An inheritance received by a party early in the relationship is generally included in the asset pool for division (Step 1) and treated like any other financial contribution (Step 2), provided it is used for the benefit of both parties.
The weight given to this contribution will depend on all other contributions made by the parties during the course of the relationship.
An inheritance received earlier may be diminished over time by subsequent contributions. The result of this is that while the inheritance may have been significant at the time it was received, it has a minimal effect on the division of the asset pool in a longer relationship.
The overall impact of an inheritance on the asset pool is another important factor to consider. If receipt of an inheritance at the beginning of a relationship has a springboard effect, enabling significant growth of the couple’s asset pool (like purchasing shares that skyrocket in value) the weight of the initial contribution will be much greater.
Obviously, an inheritance that has been spent cannot be divided between parties in a property settlement. However, its benefit can still be taken into account. If a beneficiary party’s contribution (the inheritance) is given greater weight, this may increase their percentage entitlement in a property settlement.
Inheritance received late in the relationship
An inheritance received late in the relationship is unlikely to be included in the asset pool for division (Step 1). In these circumstances, the Family Court will generally establish two separate pools:
- one pool containing the inheritance (or proceeds of the inheritance, such as a house bought with the inheritance funds); and
- one pool containing the balance of the couple’s assets and liabilities.
One significant benefit of this approach is that each pool can be divided at different percentages, depending on each party’s varying contributions to each pool.
The Family Court may “quarantine” a late inheritance from the balance of the asset pool, however, case law has shown that this is the exception and not the rule.
Inheritance after separation that is not yet received
An inheritance bequeathed to a beneficiary party, but not yet received, is a “financial resource” rather than property available for division.
In the context of the Four Step Process:
- The funds are considered to be a financial resource (Step 1);
- The funds are not taken into account as contribution by the beneficiary party (Step 2);
- The funds are not yet available for distribution to the parties in a property settlement, but the beneficiary party will soon have the benefit of those funds to meet the cost of their future needs (Step 3); and
- This prospective benefit must be considered by the Family Court in order to achieve an outcome that is just and equitable (Step 4).
Depending on the facts at hand, the non-beneficiary party’s percentage entitlement of the asset pool may increase if the beneficiary party has access to a significant financial resource after separation.
Key points to take away
- There is no absolute rule when it comes to the treatment of inheritance in family law matters. As always in the Family Court, every case turns on its facts. However, the timing of its receipt is a highly important factor when considering the treatment of an inheritance.
- The Family Court’s quarantining of assets is the exception, not the rule.
- The Family Court will usually deal with an inheritance by:
- Including the inheritance in the asset pool and considering its contribution;
- Excluding the inheritance from the asset pool and treating it as a financial resource; or
- Excluding the inheritance from the asset pool, establishing an inheritance pool and assessing the non-beneficiary party’s contribution to the inheritance pool.