How Inheritance Is Treated in Family Law Property Settlements

Inheritance often carries more than just financial value, it represents family history, emotional ties, and the legacy of loved ones. When separation occurs, questions about how inheritances are treated in property settlements can quickly become complex and contentious. In New South Wales, family law property division follows the Family Law Act 1975, which applies to both married and de facto couples. Because inheritances can form a significant part of a person’s financial position, it is understandable that many separating individuals want clear answers on whether these funds or assets will be shared.

This blog explores how courts approach inheritances in property division, the factors that influence how they are treated, and what you may expect if you are entering a property settlement after receiving an inheritance.

Is Inheritance Part of the Asset Pool in a Property Settlement?

The family law system in Australia does not automatically exclude inheritances from the property pool. Instead, inheritances are assessed alongside financial and non-financial contributions and the future needs of each party. The guiding question is whether including the inheritance results in a just and equitable outcome.

The Key Factors the Court Considers:

Timing of the Inheritance

Timing is one of the most significant considerations.

• Before the relationship: If an inheritance was received before the relationship began, it will usually be considered a financial contribution by the person who received it. This does not automatically exclude it from the asset pool, but it often carries significant weight in their favour.
• During the relationship: If the inheritance was received while the parties were together, it may be treated as a contribution to the relationship. The court looks at how the inheritance was used and whether it improved the couple’s joint financial position.
• After separation: Inheritances received after separation are less likely to be shared, but they still form part of the overall financial picture. The court may consider whether the receiving partner still requires their inheritance to meet their future needs.

Use of the Inheritance

How the inheritance was used often determines whether it is included in the property pool.

Examples include:

• Whether it was used to purchase or renovate a home
• Whether it was used to reduce debt
• Whether the funds were kept separate or invested in joint property.

If the inheritance has been mixed with joint assets, it becomes more difficult to separate from the shared property pool.

Size of the Inheritance

A large inheritance may impact the property settlement more significantly than a small one. Larger inheritances can shift the balance of contributions and may influence the final outcome.

Length of the Relationship

Longer relationships often dilute the impact of one person’s inheritance because there are usually more joint contributions over time.

Future Needs of Each Party

The court also considers future needs such as:

• Income-earning capacity
• Who is taking care of children from the relationship
• The health and age of the parties
• And what financial resources are available to the parties.

Even if an inheritance is treated separately, future needs can still affect how remaining assets are divided.

When an Inheritance may be excluded

There are circumstances where an inheritance may be treated as a separate asset. This is more likely when:

• It was received late in the relationship or after separation.
• It was kept quarantined from joint finances.
• The other party made no contribution related to the inheritance.

However, exclusion is never guaranteed.

When an Inheritance may be included

An inheritance is more likely to be included where:

• It was used to acquire or improve joint property.
• It significantly assisted the couple’s financial position.
• Both parties benefited from it during the relationship.

In these situations, the court may add the inheritance to the asset pool and make adjustments in favour of the receiving partner to recognise their contribution.

How to Protect an Inheritance

There are several strategies individuals can use to safeguard inheritances in the event of separation:

• Binding Financial Agreements: These agreements (often called prenups or postnups) can set out how inheritances will be treated if the relationship ends.
• Testamentary Trusts: A testamentary trust is created under a will and comes into effect after the will-maker’s death. Assets placed in the trust are controlled by trustees rather than being transferred directly to beneficiaries. This structure can:
  • • Provide asset protection in family law disputes, as the inheritance may not be treated as the beneficiary’s personal property.
    • Allow for flexible distribution to children or other beneficiaries over time.

These steps cannot guarantee an outcome but may strengthen a person’s position when negotiating a property settlement.

The Importance of Legal Advice

Inheritance disputes in property settlements highlight the delicate balance between law, fairness, and family dynamics. While courts have wide discretion in determining whether an inheritance forms part of the asset pool, each case depends on its unique circumstances, from the timing of the inheritance to how it was used during the relationship.

For individuals facing separation, seeking tailored advice early is essential. At Orman Solicitors, we understand the emotional and practical challenges inheritances bring, and we provide clear, compassionate guidance every step of the way.

Read Next: How assets are divided after Separation or Divorce