A complete legal guide to divorce and inheritance in Australia

Few life events are as emotionally challenging as losing a loved one or going through a divorce. When these two events coincide, navigating the intersection of inheritance and family law can feel especially daunting.

By Samuel Warren, Solicitor at AFL Maroochydore

Will your inheritance be protected in a divorce? Understanding how inheritances are treated under Australian family law is crucial. This complete guide to divorce and inheritance breaks down your rights, legal considerations, and practical steps to help you safeguard your assets during separation and divorce.

Does my ex have a claim to my inheritance in a divorce?

One of the most common questions in family law is whether an ex-partner has a claim to an inheritance during separation or divorce. The short answer is that inheritances are not automatically excluded from property settlements. Each case will be assessed on an individual basis; however, in many cases the Court will include assets received through an inheritance as part of the ‘pool’ of assets available to be divided. 

In most cases when determining a property settlement dispute, the court will apply a four-step test:

1. Identify all assets, including property, superannuation, debts and ‘financial resources’ (such as pensions or trusts) of the parties, and create a ‘pool’ of assets to be divided.
2. Assess the parties’ contributions to the pool – this includes financial, non-financial, and homemaking contributions before the relationship (such as what assets you initially had before your relationship), during the relationship, and post-separation.
3. Consider future factors (such as with whom children of the relationship live, income disparity between the parties, age, and health).
4. Ensure that the division is just and equitable.

In applying this four-step test, the Court can deal with an inheritance in many different ways. For example, the Court might: 

• ‘Quarantine’ the inheritance to ensure that only the inheriting party receives all or nearly all of it by placing the inheritance in a separate ‘pool’ to the majority of the assets, which is then divided in a different manner from the primary pool.
• Include the inheritance in the primary pool, but compensate the party who received the inheritance by increasing their assessed contributions to the pool and thus awarding a larger portion of the primary pool.
• Compensate the party who did not receive the inheritance by increasing the amount they receive of the primary pool in assessment of the relevant future factors of the parties, as the receiving party is better able to support themselves.
• Determine a looming or prospective inheritance to be a ‘financial resource’ of a party and compensate the other party when assessing future factors. 

There are a number of ways for an inheritance to form part of a property settlement dispute, and the Court is not limited to a strict test or formula as to how inheritances are to be managed. However, past cases show us that some factors that influence how inheritances are treated include:

• Timing of the inheritance – (an inheritance received early in the relationship will likely be treated differently than one received late or even post-separation and could more likely be considered a financial resource or quarantined).
• Nature of the relationship – (longer relationships may dilute the individual significance of an inheritance. For instance, an inheritance received early in the relationship may be given little weight).
• Contributions to the inheritance or windfall – (Courts may consider whether both parties contributed to obtaining or maintaining the inheritance. This would apply where a party was helping the person who was leaving the inheritance with driving them to their appointment, paying their bills, or picking up their groceries for them).
• Significance of the inheritance – (An inheritance of $10,000 compared to a pool of $1,000,000 might be treated differently than an inheritance of $1,000,000 compared to a pool of $10,000).

What about future inheritances?

If you’re expecting an inheritance, the Courts will generally only consider it under specific circumstances, such as:

• The person leaving the inheritance (e.g., a parent) is critically unwell or unable to change their will.
• The inheritance is significant and relevant to determining the ‘financial resources’ of a party, but the inheritance is close to being received. 

Disclosure of prospective inheritances:

You are required to disclose financial resources, including expected inheritances, during family law property proceedings. However, this disclosure typically does not require a valuation or detailed documentation of the testator’s financial position.

Disclosure in this area is complicated and depends on the circumstances of your matter. For example, you are not required to disclose a prospective inheritance if there is no suggestion that the inheritance is soon to be received, as it is unlikely to be considered a financial resource, or at least it is unlikely to be relevant as it is too far afield. 

Does inheritance affect alimony or spousal maintenance?

Inheritances can affect spousal maintenance (referred to in other jurisdictions as ‘alimony’), depending on whether you are the payer or recipient.

• For recipients: If you receive an inheritance, you may lose entitlement to spousal maintenance if you can now support yourself. You might also become liable to pay spousal maintenance if your spouse has a need, and your inheritance is sufficient to meet that need.
• For payers: If your ex receives an inheritance, you may be able to reduce or terminate your payments. This will depend upon the extent to which your spouse is able to meet their reasonable needs and your financial capacity to meet those needs.

Considerations for spousal maintenance financial agreements:

If you and your former partner intend to enter into a financial agreement in relation to spousal maintenance where there is the possibility of an inheritance, you may wish to:

• Include a sunset clause – (a provision that allows the agreement to be reviewed after a set period or specific event, such as the receipt of an inheritance).
• If the inheritance changes your financial circumstances significantly, you can apply to the Court to set aside or vary the agreement.

Is there an inheritance tax in Australia?

Australia does not have an inheritance or estate tax (commonly called a ‘death tax’) however, family law and inheritances can come with tax implications, such as:

Capital Gains Tax (CGT):

• Applies when assets are sold or transferred.
• The court may consider CGT liabilities during property settlements.

Income Tax:

• Rental income, dividends, or other earnings from inherited assets are taxable.

Whether the court will take capital gains tax into consideration in the property pool will depend on a range of factors, including the method of valuation, the likelihood of it being realised in the foreseeable future, the circumstances of its acquisition, and the evidence of the parties to their intention to the asset. 

If your agreement reached with your former partner includes the sale of a real property, it is important to consult with a family lawyer to ensure that the incursion of the capital gains tax liability is (or is not) taken into consideration.

Protecting your inheritance 

If you’re concerned about protecting your inheritance or believe your former partner may have received money, it’s important to seek legal advice. 

A family lawyer can:

• Guide you through property settlement negotiations and documentation – family law proceedings are stressful, and it is a good idea to have someone on your side that takes the emotion out of the equation. 
• Help negotiate agreements that safeguard your interests – family lawyers can ensure that your agreement reached is enforceable and gives you peace of mind. 
• Ensure that inheritances are dealt with appropriately – it is important that you protect your own assets and make sure that you are not missing out on anything you are entitled to. 
• Ensure tax implications are properly managed – tax issues are complicated, and there are steps family lawyers can take to ensure that your interests are protected. 

How to protect an inheritance in a divorce

Inheritances can complicate property settlements, but with the right advice, you can navigate these challenges and protect your future. Contact our specialist team of family lawyers today for tailored guidance for your parenting, property, or divorce matters.

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