Many Australians will receive an inheritance at some point in their lives – often involving property, shares, or substantial financial gifts. But when a relationship breaks down, what happens to that inheritance after separation?
Understanding how inheritances in family law property settlements are treated is crucial – especially if you’ve received, expect to receive, or are negotiating around one during separation.
This article explores how inheritances in family law property settlements are treated under Australian law – whether received before, during, or after a relationship.
Common questions about inheritances in Family Law property settlements:
How does family law treat inheritance during divorce?
Inheritances are generally considered part of the property pool. However, the way they are treated depends on factors such as timing, how the inheritance was used, and each party’s overall contributions.
Is an inheritance excluded from the property pool?
Not automatically. While some believe inheritances are protected, they can be included in the asset pool if they benefited the relationship or were mingled with joint assets.
What if I receive an inheritance after separation?
An inheritance received after separation can still be relevant. The Court may consider it a financial resource or include it in a separate pool, depending on the circumstances.
Are inheritances automatically excluded from property settlements?
No. Inheritances are not automatically quarantined from family law property settlements. The Court will assess each case individually, considering when the inheritance was received, how it was used, and the future needs of both parties.
Whether the inheritance was received before, during, or after the relationship – or is simply expected in the future – Australian family law takes a structured and case-by-case approach when deciding how inheritances are treated in a property settlement.
Key Takeaways:
- Inheritances are not automatically excluded and are often considered part of the property pool.
- The Court considers timing, value, use, and contributions related to the inheritance.
- Impending inheritances may be included; speculative future inheritances usually are not.
- Full and frank disclosure is essential to avoid delays, disputes, or penalties.
- Early legal advice can make all the difference in securing a fair property settlement.
How does the Family Court divide property?
The Court applies a structured four-step approach under the:
- Identify and value the asset pool – This includes all assets and debts, owned jointly or separately.
- Assess contributions – Financial and non-financial contributions from both parties, including inheritances.
- Consider future needs – Such as income, age, health, and care of children.
- Ensure the outcome is just and equitable – The division must be fair given the full circumstances.
Are inheritances automatically excluded from property settlements?
No. Contrary to popular belief, inheritances are not automatically excluded or quarantined from family law property settlements. Inheritances are generally considered part of the asset pool that is available to be divided, though how they are treated depends on various factors and the specific circumstances of your case.
When and how are inheritances included in property settlements?
1. Inheritance received during the relationship
If you receive an inheritance during your marriage or de facto relationship, it is usually treated as part of the property pool to be divided between you and your partner.
- The Court will assess your contribution to the property pool, including the inheritance.
- How the inheritance was used is important – was it kept separate, or mingled into joint accounts or assets?
- For example, if the inheritance was used to pay down a mortgage on a family home, this benefits the couple and the inheritance is likely treated as a joint contribution.
- The timing matters. Inheritances received early in a long relationship may have less weight than those received later.
2. Inheritance received late in the relationship or after separation
For inheritances received shortly before or after separation, the Court may:
- Either include the inheritance in the main asset pool, or quarantine it separately using a “two-pool” or “asset-by-asset” approach.
- Still consider it a financial resource when assessing future needs, which may affect how other assets are divided.
- The approach depends on whether there are sufficient assets in the main pool to satisfy the non-inheriting party’s entitlement.
How the Court treats a post-separation inheritance is critical.
In cases involving an inheritance received after separation, the Court must first determine whether it should be treated as “property” or as a “financial resource”. This distinction plays a key role in how the matter is ultimately resolved.
If the inheritance is considered property, it forms part of the asset pool available for division between the parties. The Court then has discretion in how it is dealt with, including the possibility of “quarantining” the inheritance so it remains separate from assets accumulated through joint contributions. Whether this occurs will depend on the specific facts of the case and the approach taken by the judicial officer. For example, an inheritance received as real estate held solely in one party’s name may be treated as property.
If, however, the inheritance is characterised as a financial resource, it is not included directly in the asset pool. Even so, the Court can still take it into account when determining a fair division of the remaining assets, potentially adjusting the outcome in favour of the other party to reflect their future needs. An inheritance held within a testamentary trust — particularly where the beneficiary has little or no control over it — is a common example of something that may be treated as a financial resource rather than property.
3. Future inheritances
A future inheritance is generally not included in the property pool because a living benefactor can change their will at any time, and the future expected inheritance is not guaranteed.
- The Court may consider a future inheritance as a financial resource if the inheritance is imminent and likely, for example, if the testator is elderly and lacks testamentary capacity.
- This discretion is case-specific and depends on the likelihood, size, and timing of the inheritance.
4. Impending Inheritances
A crucial distinction exists between impending inheritances and expected future inheritances:
- Impending inheritance: The benefactor has died or is imminently deceased, and the estate is being distributed.
- Expected future inheritance: The benefactor is alive and may change their will.
Impending inheritances may be taken into account in property settlements if they are substantial and imminent. Courts may even adjourn proceedings to await the receipt of an impending inheritance when it significantly affects the property pool. By contrast, expected future inheritances are generally too speculative to consider.
Why disclosure of inheritances matters
Failing to disclose a received or impending inheritance can result in:
- A consent order or financial agreement being overturned
- Adverse cost orders or penalties
- A delay in finalising your settlement
Transparency ensures a fair and enforceable outcome.
The obligation to disclose can become more complicated where there are parallel proceedings in another jurisdiction – for instance, if there are Supreme Court proceedings on foot to challenge a will. In those situations, there may be limits on how documents obtained in that matter can be used for family law purposes.
Using documents from one proceeding for a different, unrelated purpose can breach the “Harman obligation”, which prevents parties from using material obtained in one case for a collateral purpose. If you are involved in both estate and family law proceedings at the same time, it is important to obtain legal advice before sharing or relying on documents across the two matters.
Do inheritances affect spousal maintenance?
Yes. If one party receives an inheritance, it may:
- Reduce or eliminate their right to receive spousal maintenance
- Trigger a variation or end to an existing maintenance obligation
You should review any maintenance agreements if inheritance circumstances change.
Tax considerations
While Australia does not have inheritance or estate tax, Capital Gains Tax (CGT) may apply when inherited assets are sold, and income tax applies if they generate rental or investment income. Always speak with an accountant about tax considerations during your settlement negotiations.
Get advice before negotiating a property settlement
Whether you’ve received, are about to receive, or expect to receive an inheritance, it’s essential to get tailored family law advice.
At MST Lawyers, our Family Law team can help you understand your rights, protect your entitlements, and negotiate with confidence.
Contact us today for clear, practical advice on inheritance and family law property settlements.
Key Resources
For more detailed information, you can refer to the Family Law Act 1975 (Cth), which outlines the legal framework for property settlements in Australia.
The Federal Circuit and Family Court of Australia also provides guidance on how financial matters are determined during separation.
If your inheritance includes assets such as property or shares, you may want to review the ATO’s guidance on inherited property and Capital Gains Tax.
You can also explore spousal maintenance obligations and financial advice on managing an inheritance through government resources.
