Key Takeaways:

• An inheritance is not automatically excluded from a property settlement in a separation or divorce under the Family Law Act 1975.
• What matters is when the inheritance was received, how it has been treated or used, and how it has been managed within the relationship. 
• You can take proactive steps (for example via a binding financial agreement) to try to ‘quarantine’ the inheritance and reduce risk, but there are no guarantees.
• Early legal advice is vital - the sooner you act, the more options you are likely to have to preserve your interests.

 

When relationships end, dividing assets can quickly become complex - especially when one partner has received an inheritance. 

Many assume inheritances are automatically off-limits in a divorce, but that’s not always true. Under Australian family law, how and when the inheritance was received can determine whether it’s included in the property pool. Learning how to protect inheritance from divorce early can prevent unnecessary conflict later.

 

Firstly, what is an inheritance? 

Generally, an inheritance refers to money, property, shares or other assets passed to someone following the death of a loved one. For example, after the death of a partner, the surviving partner may receive their superannuation or the entirety of their shared home. Following the death of a parent, it might involve inheriting a portion of the family property, savings, or personal belongings.

When a relationship breaks down, it’s common to wonder: will my ex have a claim over the inheritance I’ve received? Is there a way to protect it?

 

Why does an inheritance matter in divorce? 

Under the Family Law Act, the Court has broad legal authority to make decisions about how property is divided between married or de facto partners. This means (contrary to popular belief) inheritances are not automatically excluded from being considered in a property settlement as part of a divorce.

In practical terms, the way your inheritance is treated depends on a number of factors. If the inheritance (such as $100,000) has been used for the benefit of both partners - for example, a shared family home - then it often becomes part of the shared asset pool to be divided. On the other hand, if money (or other inheritance) has been kept completely and clearly separate, such as an individual account not used for joint expenses or investments, the Court is more likely to treat it as belonging solely to the inheriting partner, though it can still influence the overall outcome indirectly.

 

Key factors the Court will consider when deciding how to deal with an inheritance 

When dealing with inheritances in family law property matters, the following key considerations typically apply:

• Timing – Was the inheritance received before the relationship, during the relationship, or after separation but before final orders are made? For instance, the Court is less likely to adjust the asset split for an inheritance received early on in a long relationship than for one received closer to the end of it. 
  • Note: If you receive an inheritance after you’ve separated, you’re still required to disclose it. Even though it was received post-separation, it can still be relevant when the Court decides how to divide property.
• Application – Has the inheritance been used to benefit both partners (e.g., invested in the family home, paid joint debts, used for household expenses)? If so, it’s more likely to be treated as part of the joint asset pool.
• Size relative to the pool – The relative size of the inheritance compared to the overall asset pool may affect how heavily it is weighed. For instance, if you inherit $50,000 and the combined assets of you and your partner total $1 million, it’s unlikely to shift the overall property division much. But if the inheritance is $500,000 and makes up most of the shared wealth, it will likely have a far greater impact on the outcome.
• Future needs of the parties – The Court will look at future needs of both partners, such as their age, health, income earning capacity, and who will care for any children. The inheritance may count either as a direct contribution or a financial resource to the person who originally received it For example, if one partner receives an inheritance and keeps it in their own name, the Court might see it as giving them extra financial support or stability in the future, which would influence how much weight is given to their financial need.
• Whether the inheritance remains separate – If the inheritance remains untouched and separately held, that strengthens the case for it being treated separately. If it has been co-mingled, the separation of the inheritance from the joint asset pool is harder.

 

Practical steps to protect an inheritance 

While the outcome in each case will depend on individual circumstances, there are practical steps you can take to reduce the risk of your inheritance being included in a property settlement. Taking these precautions early can make a significant difference in protecting what’s been left to you.

1. Consider a Financial Agreement 

   A Financial Agreement is a formal agreement between parties that sets out how assets (including assets inherited) will be treated in the event of separation. A Financial Agreement can be entered into before, during or after a relationship. With the right legal advice, it can significantly reduce the risk of your inheritance being included in the shared asset pool if you separate. For a Financial Agreement to be binding, it must meet strict formal requirements, so it’s important to engage a lawyer early for independent legal advice.

2. Keep the inheritance separate and avoid using the inheritance for joint endeavours 

   As soon as you receive an inheritance, avoid mixing it with joint funds. For example, avoid transferring it into a joint bank account, using it to buy a family home jointly, or spending it on shared household expenses. The clearer the “paper trail” of separate ownership, the better.

3. Document the origin and nature of the inheritance

   Retain the Will, trust deed or estate distribution documents. Maintain separate bank accounts or title documents. The more clearly you can demonstrate that the funds or assets are an inheritance and have been kept distinct, the stronger your position.

4. Consider using a testamentary trust 

   If you are preparing your own will, or a family member wants to leave you an inheritance, consider speaking with a lawyer specialising in wills and estate planning about using a “testamentary trust”. A testamentary trust allows an inheritance to be managed by a trustee for the benefit of the person receiving it, rather than passing it directly to them. The less control the recipient has over a testamentary trust, the more likely the inheritance is to be considered a financial resource, rather than property to be divided as part of the shared asset pool. Setting up a testamentary trust requires careful planning and professional advice to ensure it genuinely limits exposure in the event of a relationship breakdown.

5. Seek advice early 

   The earlier you take advice, the more options you have: freezing or isolating the funds, structuring ownership, or ensuring the right agreements are in place. In a complex environment (blended families, second marriages, business interests, etc.) the risks are greater.

 

Why early legal advice is important 

Every separation is unique. A family law expert can help you evaluate your particular situation, including the nature of the inheritance, the length of your relationship, yours and your partner’s contributions, the size of the overall asset pool, and the future needs of both parties.

They can assist you to:

• assess whether the inheritance is likely to be included or can be quarantined;
• draft or review a Financial Agreement to protect inheritances;
• ensure full and frank disclosure (ignoring or concealing something can cause problems later) and avoid costly disputes; and
• negotiate an appropriate property settlement.

 

Conclusion

Inheritances bring added complexity to property settlements, but with the right approach, they don’t have to become a source of vulnerability. 

Remember: an inheritance is not automatically protected under the Family Law Act, but by keeping assets separate, documenting properly, considering a Financial Agreement, and seeking early legal advice, you can greatly improve your chances of preserving what was intended for you.

If you’re facing separation, are about to receive an inheritance, or simply want to understand how one might be treated, getting legal advice early is key. Get in touch with our team of experienced family lawyers on 1300 052 224 or at info@bwbfl.com.au to arrange an initial confidential appointment. 

To understand what to expect when working with us, visit Your First Meeting at Best Wilson Buckley Family Law.