Introduction

Inherited assets can significantly complicate property settlements in family law matters. Many fathers assume that inherited property remains separate from the relationship asset pool, but this isn't always the case. Understanding how courts treat inherited assets is crucial for protecting family wealth and planning effective property settlements.

The Basic Principle

In Australian family law, there is no automatic exclusion of inherited assets from property settlements. The Family Court considers all assets and liabilities when making property orders, regardless of their source. However, the source of assets (including inheritance) is one factor the court considers when determining a "just and equitable" division.

Common Misconception

Many people believe inherited assets are automatically protected in divorce. This is not correct - inherited assets can be included in property settlements, but their source may influence how they're divided.

How Courts Approach Inherited Assets

The Four-Step Process

Courts follow a structured approach to property settlement:

  1. Identify and value all assets and liabilities
  2. Assess contributions (financial and non-financial)
  3. Consider future needs of each party
  4. Determine if the proposed division is just and equitable

Inherited assets are considered at each step, particularly in assessing contributions.

Factors Affecting Treatment of Inherited Assets

Timing of Inheritance

  • Before relationship began
  • During relationship
  • After separation
  • Expected future inheritance

Use of Inherited Assets

  • Kept separate from relationship
  • Used for family benefit
  • Mixed with other assets
  • Used to acquire joint assets

Length of Relationship

  • Short relationships (under 5 years)
  • Medium relationships (5-15 years)
  • Long relationships (over 15 years)
  • Relationship with children

Size and Nature

  • Substantial vs modest inheritance
  • Cash vs property vs business
  • Proportion of total asset pool
  • Ongoing income generation

Common Inheritance Scenarios

Scenario 1: Pre-Relationship Inheritance

Facts: John inherited $500,000 from his father before meeting Sarah. They married 2 years later and separated after 5 years of marriage.

Likely outcome: John's inheritance would likely be given significant weight as his contribution, especially if kept separate. However, if used for the family home or mixed with joint assets, it may be treated differently.

Scenario 2: Inheritance During Long Marriage

Facts: During a 20-year marriage, Mary inherited the family farm worth $2 million. The couple used farm income for family expenses and made improvements together.

Likely outcome: Despite being inherited, the long relationship, joint use, and improvements may result in the farm being treated more like a joint asset, though Mary's initial contribution would be recognized.

Scenario 3: Post-Separation Inheritance

Facts: After separation but before property settlement, David inherited $300,000 from his grandmother.

Likely outcome: This inheritance would likely remain with David as it occurred after separation, though it might be considered in assessing his future needs.

Protecting Inherited Assets

Strategies During Relationship

  • Keep separate: Maintain inherited assets in separate accounts/ownership
  • Document clearly: Keep records of inheritance source and use
  • Avoid mixing: Don't combine with joint assets
  • Consider trusts: Hold inherited assets in family trusts
  • Binding Financial Agreements: Pre or post-nuptial agreements

Trust Structures

  • Inherited assets held in discretionary trusts
  • Testamentary trusts created by deceased's will
  • Protective trust structures
  • Consider tax implications

Estate Planning Tip

Parents can protect intended inheritances by using testamentary trusts in their wills, which can provide better protection than direct bequests.

When Inherited Assets May Be Fully Included

High Risk Scenarios

  • Long relationships (15+ years)
  • Inheritance used for family benefit
  • Assets mixed with joint property
  • Significant improvements made by both parties
  • Inheritance forms small part of total assets
  • Other party has greater future needs

The "Notional Adding Back" Approach

Sometimes courts use a "notional adding back" approach:

  • Inherited assets are notionally added back to the inheriting party
  • Remaining assets divided based on other contributions
  • Results in inheriting party receiving inheritance plus their share
  • More common in shorter relationships

Special Considerations

Family Homes and Inheritance

  • Inherited family home used as matrimonial home
  • Inheritance used to purchase family home
  • Improvements made to inherited property
  • Emotional attachment vs financial value

Business Inheritances

  • Family businesses passed down generations
  • Ongoing involvement of both parties
  • Valuation challenges
  • Impact on business operations
  • Employee and family considerations

Future Inheritances

  • Expected inheritances from aging parents
  • Contingent interests in family trusts
  • Difficulty in valuation
  • Uncertainty of timing and amount
  • Generally given less weight

Tax Implications

Capital Gains Tax

  • Inherited assets receive "stepped-up" cost base
  • CGT may apply on subsequent sale
  • Main residence exemption considerations
  • Rollover relief in property settlements

Income Tax

  • Income from inherited assets
  • Trust distribution tax implications
  • Depreciation and deductions
  • Impact on Centrelink benefits

Practical Steps

If You Expect to Inherit

  • Discuss with parents about protective structures
  • Consider Binding Financial Agreements
  • Plan for tax-effective structures
  • Document intentions clearly

If You Have Inherited

  • Keep detailed records of source and use
  • Maintain separate ownership where possible
  • Consider trust structures
  • Seek legal and tax advice
  • Review estate planning

During Property Settlement

  • Provide clear evidence of inheritance
  • Document how assets were used
  • Consider timing and relationship length
  • Negotiate based on all circumstances
  • Consider tax implications of division

Case Law Principles

Key Cases

  • Ferraro v Ferraro: Inheritance timing and use
  • Kardos v Kardos: Substantial inheritance in long marriage
  • Bonnici v Bonnici: Pre-relationship assets
  • Clauson v Clauson: Inherited business interests

Evolving Principles

  • Courts increasingly consider practical use over legal ownership
  • Greater protection for recent inheritances
  • Recognition of family wealth preservation
  • Balance between inheritance protection and fair division

Need Help Protecting Your Inheritance?

Inheritance issues in family law require careful planning and expert advice. Protect your family's wealth with professional guidance.

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Legal Disclaimer

This information is for educational purposes only and should not be considered legal advice. The treatment of inherited assets in family law depends heavily on specific circumstances and continues to evolve through case law. Tax implications are complex and require specialist advice. Always consult with qualified family law and tax professionals for advice specific to your situation. DadAssist makes no warranties about the accuracy or completeness of this information.