Receiving an inheritance can be somewhat of a silver-lining during some of the most stressful periods in a human life. Losing a loved one can be difficult enough, and sometimes ensuring that the financial matters are resolved properly, efficiently, and without too much strife between siblings and other family members can be an added complexity. Care should be taken, however, to consider how inherited funds are going to be used and if the party receiving the inheritance needs to take steps to ensure their inheritance is protected.
When receiving an inheritance while in a relationship, the way those funds are intended to be used will influence whether further steps are required to ensure the funds are protected. It is important that a party receiving an inheritance speaks with a specialist family lawyer at the time to ensure their interests are protected – dealing with it upon separation or death may be too late.
This article discusses the classification of property received by way of inheritance as “separate property” under the Property (Relationships) Act 1976 (the Act), when this property may lose its protection as “separate property” and become “relationship property”, and what can be done to protect the inheritance from losing its “separate property” status.
Default position – Inheritance is separate property
The starting point is that any property acquired by a spouse or partner by way of succession (i.e. inheritance) is classified as that party’s separate property under section 10 of the Act.
This means that if a relationship ends (through separation or death), the inheritance will not be included in the relationship property asset pool and will remain the separate property of the party that originally received the inheritance. The non-receiving party does not have a claim over the inheritance by the other party.
However, if it were only that simple, this article would not be necessary.
Inheritance can become relationship property
The classification of inheritance as separate property can change depending on how the inheritance is used while the relationship between the parties remains on foot.
If the property received by way of inheritance is kept completely separate from the relationship (e.g. the funds are kept in a separate bank account, term deposit, or shares account in the sole name of the party who received the inheritance) then the assets will continue to be separate property and section 10 will continue to apply.
However, if the inheritance is used (with the express or implied consent of the party who received it) to fund relationship property assets, or is subsequently intermingled with relationship property to the point that it is “unreasonable or impracticable” to regard it as separate property, the situation becomes much less straight forward.
- Paying down mortgage on family home – The family home is classified as relationship property regardless of when or how it is acquired, meaning it will be shared equally between the parties upon separation or death. By applying inheritance funds to the family home means that these funds automatically become relationship property and the other partner or spouse will have a 50% claim over those funds upon separation.
- Joint bank account deposits – Any bank accounts in the partners’ joint names in which funds are being deposited during the relationship are ordinarily relationship property. Accordingly, using separate property (the inheritance) to bolster relationship property (e.g. a joint term deposit) intermingles separate property with relationship property. Over time, the separate property can become so intermingled with relationship property that it is unreasonable or impracticable to trace the separate property within the relationship property, and the status of the inheritance as separate property may be “lost”. The whole of the term deposit account may become relationship property upon separation or death, and the other partner may have a 50% claim over those funds.
For example, Party A and B have an investment account with $200,000 invested. Party A receives a $500,000 inheritance and adds it to the investment account. Throughout the relationship, Party A and B used the invested funds (which itself fluctuated over time) to buy other relationship property items (such as a new family vehicle), some funds were withdrawn, and further funds were added from the parties’ incomes. Party A and B separate and the balance of the investment account is $400,000.
In this situation, it is likely that the whole of the inherited funds have become too intermingled and that tracing the original inheritance funds is no longer possible. If so, the entire investment account will be subject to an equal division between Party A and B upon separation. If some of the funds remain traceable, these may remain Party A’s separate property, but this could be a difficult and expensive exercise (to be undertaken by a forensic accountant).
How do I keep separate property as separate property?
CONTRACT OUT! There is a fairly straight forward and effective way to ensure that inheritance, regardless of how it is used within the relationship, will remain the separate property of the receiving partner.
The parties will need to enter into a Contracting Out Agreement under section 21 of the Act which provides the requirements of these type of agreements.
A Contracting Out Agreement can document that if or when one or both of the parties to the relationship receive an inheritance that these funds, regardless of their use and subsequent classification under the Act, will always remain the separate property of the party that received the funds. It is important that the agreement clearly stipulates the parties’ intentions and is drafted correctly by a specialist family lawyer.
These agreements need to comply with specific requirements under the Act to be enforceable, and oral or informally written agreements between the parties are insufficient to achieve the same outcome.
If you are in a relationship and know you are going to receive an inheritance, or even if you have already received an inheritance, it is important that you speak to a specialist family lawyer to ensure your interests are protected. For more information please contact a member of our family & relationship or private client law teams.
 Relationship in the context of the Property (Relationships) Act 1976 includes de facto partners, same sex relationships, civil unions and marriage.
 Section 10(3) sets out the legal test for inheritance becoming relationship property.
 Family home is defined as “the dwellinghouse that either or both of the spouses or partners use habitually or from time to time as the only or principal family residence, together with any land, buildings, or improvements appurtenant to that dwellinghouse and used wholly or principally for the purposes of the household” in section 2 of the Property (Relationships) Act 1976.
 There are exceptions to this general rule.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.