Is Inheritance Considered Property in Family Law Proceedings?

By Madisson Webber, Lawyer

Discretion of the Family Courts in Australia

The process of determining a just and equitable (fair according to the law) division of property and assets in family law proceedings by the Federal Circuit and Family Court of Australia (“the Court”) is discretionary in nature.  There is no “formula” used to divide your property and finances.

Process of Determining a Just and Equitable Outcome

The Family Law Act 1975 (Cth) (“the Act”) sets out the general principles that the Court must consider when deciding how property is to be divided to reflect a just and equitable outcome. There are different sections which cover the division of property between couples who have married, as opposed to those who were in de facto relationships, but essentially the same principles apply to both.

The Court must consider several factors in determining property division, including:

1. Whether it is just and equitable to make any order for property division at all.  (In some cases, for example, where the parties have kept their assets strictly separate, the Court does not interfere with this);
2. The value of the assets, liabilities and superannuation owned by each respective party as at the time of hearing (which includes property owned jointly and can include property or inheritances received after separation, as per the case law referred to below);
3. Initial contributions, financial contributions, non-financial contributions and contributions as a homemaker or parent;
4. The future needs of the parties, whereby there may be an adjustment in favour of one party based on either difference in age, income, health, earning capacity and the care of the children (if any); and
5. Any orders made by the Court are just and equitable.

How is Inheritance Treated by the Courts?

It is important to note that any inheritance received cannot necessarily be regarded as a protected category of property and will not be automatically treated differently from other assets available for distribution.

In Holland & Holland [2017] FamCAFC 166 at [32]:

“While it might be convenient to describe property by reference to a characteristic (for example, as an “inheritance” or “post-separation” or “after‑acquired” property), its place within the ambit of s 79 is determined by the fact that it exists as a legal or equitable interest of the parties to the marriage or either of them and that the nature, form and characteristics of it and the contributions of all types made by the party suggest that it should be treated in a particular way.”

Inheritance Received Before and During the Relationship

When the Court is assessing how to divide the assets to reflect a just and equitable outcome, the Court will assess how the inheritance was applied in the relationship.  If the parties are in a long relationship, what is commonly known as the erosion principle applies where the financial and non-financial contributions are largely equal.  The erosion principle effectively stipulates that with the passage of time, the value of pre-marital assets diminishes because it can be outweighed against the contributions of the other party.  In that regard, the Court may make no consideration to inheritance received prior to the commencement of the relationship or during a long relationship.

Inheritance Received Post Separation

It is a common misconception that inheritance received post-separation ought to be excluded from the property pool.  Recent case law suggests that the Courts are taking a more holistic approach in determining assets to be divided between the parties.

In Calvin & McTier [2017] FamCAFC 125 the Full Court of the Family Court of Australia heard an appeal by a husband who argued that the inheritance he received four years post-separation ought to be excluded from the overall property pool.

Facts of the Case:

1. The parties were married for eight years with the marriage ending in 2011. There is one child of the marriage.
2. Since separation, the child has been equally cared for by both parents.
3. In 2014, the husband received a sum of approximately $430,686 in inheritance, which accounted for approximately 32% of the parties’ assets.
4. The husband has also made significant contributions at the commencement of the relationship in addition to the inheritance he received.

The Full Court stated at [51]-[53]:

“…The court retains a discretion as to how to approach the treatment of after-acquired property.  The trial magistrate could have included the inheritance amongst the property to be divided or dealt with it separately…it was not submitted that any error said to have arisen from the inclusion of the inheritance for division led to a result which…was inappropriate.”

The husband’s appeal was dismissed, and the wife was given a 10% adjustment in her favour due to a difference in the parties’ earning capacity under section 75(2) of the Family Law Act 1975 (Cth).  It was therefore decided that the wife would receive 35% of the overall property pool which included the inheritance.

This case demonstrates that the Court may exercise its discretion to include inheritance received post-separation when dividing the assets between the parties to reflect a just and equitable outcome.