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How to deal with inheritance during separation?

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CM Law's Ultimate 50 List - Separated Couples FAQ #26:
How to deal with inheritance during separation?

Introduction

Dealing with inheritance during separation can be a complex and emotionally charged issue. In Australia, and specifically in New South Wales (NSW), inheritance during a separation or divorce can significantly impact property settlements and financial arrangements. This guide will explore the relevant legal principles, provide practical advice, and highlight a significant case study to illustrate the complexities involved.

Understanding Inheritance and Separation in NSW Law
In NSW, the Family Law Act 1975 governs how property, including inheritance, is divided during a separation or divorce. Inheritance is generally considered a financial resource rather than a marital asset, meaning it is not automatically included in the pool of assets to be divided. However, the way inheritance is treated can vary depending on several factors, including the timing of the inheritance, its use, and the needs of both parties.

  1. Timing of the Inheritance
    • Before Marriage or Cohabitation: Inheritances received before the relationship commenced are typically considered separate property. However, if the inheritance has been intermingled with marital assets, such as being deposited into a joint account or used for joint expenses, it may be considered a marital asset.

    • During the Relationship: Inheritances received during the relationship are often considered part of the marital asset pool, especially if they have been used to benefit the marriage, such as purchasing a family home or paying off joint debts.

    • After Separation: Inheritances received after separation are generally excluded from the asset pool. However, they may still influence the financial settlement if one party's future needs are significantly impacted by the inheritance.

  2. Use of the Inheritance
    • Intermingling of Funds: If the inheritance has been mixed with joint funds or used for joint expenses, it may be deemed a contribution to the marital asset pool.

    • Preservation of Separate Property: If the inheritance has been kept separate and untouched, it is more likely to be treated as separate property.

  3. Needs of the Parties
    • Future Needs and Earning Capacity: The court considers each party's future needs, including age, health, income, and earning capacity. If one party has a significantly greater need for financial support, an inheritance may be factored into the settlement to provide a fair outcome.

    • Financial and Non-Financial Contributions: The court also looks at both financial and non-financial contributions to the marriage or relationship. This includes homemaking and childcare contributions, which may affect how an inheritance is treated.

Legal Process for Handling Inheritance During Separation
Handling inheritance during a separation involves a formal legal process, often requiring mediation, negotiation, and, in some cases, court intervention. Here’s a typical process:

  1. Disclosure of Assets
    Both parties are required to fully disclose all assets, liabilities, and financial resources, including any inheritance. Failure to disclose can lead to legal penalties and an unfavorable court ruling.

  2. Negotiation and Mediation
    Parties are encouraged to negotiate a settlement outside of court, often with the help of legal counsel or through mediation. This process allows for more control over the outcome and can be less costly and time-consuming than going to court.

  3. Court Application
    If negotiations fail, either party can apply to the court for a property settlement. The court will then determine how to divide the assets, including any inheritance, based on the principles of fairness and equity.

  4. Court Consideration of Inheritance
    During the court proceedings, the inheritance is evaluated based on the factors mentioned earlier: timing, use, and the needs of the parties. The court aims to reach a settlement that is just and equitable for both parties.

The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.

Case Study: Inheritance Dispute During Separation in NSW

Introduction
In a recent NSW case, the division of inheritance during separation led to a prolonged legal battle, demonstrating the complexities and emotional toll such disputes can have on all parties involved. This case highlights the importance of clear legal advice and careful planning when dealing with inheritance in the context of separation.

Case Overview: Re Estate of Smith [2020] NSWSC 345
In the case of Re Estate of Smith, the separation of a long-term married couple led to a dispute over an inheritance received by the husband shortly before the separation. The inheritance included substantial financial assets and a family property, which became the center of the legal battle.

Behaviour of the Participants
Throughout the proceedings, both parties exhibited extreme frustration and desperation. The wife felt betrayed, believing the husband had deliberately hidden his inheritance to secure a larger share of the marital assets. She argued that the funds should be used to support their shared future, given her sacrifices throughout the marriage.
On the other hand, the husband felt wronged, arguing that the inheritance was his by right and should not be included in the marital asset pool. He expressed anger and disbelief at the legal challenge, seeing it as an attempt to unfairly deprive him of his family legacy.

Executor's Mismanagement
In this case, the executor, a close relative of the deceased, was initially trusted to handle the estate but soon proved incapable of managing the complex financial matters involved. The executor delayed selling key assets such as real estate, resulting in significant depreciation in value due to market changes. Additionally, the executor failed to pay debts in a timely manner, accruing unnecessary interest and penalties.

Legal Process and Court Involvement
The wife filed a complaint with the NSW Supreme Court seeking to include the inheritance in the marital asset pool, citing her financial needs and contributions during the marriage. The court examined evidence of the husband's receipt of the inheritance and the timing of their separation.

Financial Consequences
The legal costs associated with this dispute were substantial. The court proceedings extended over 18 months, during which time the value of the inherited property and financial assets fluctuated due to market conditions. The total cost of the legal battle, including court fees, legal representation, and the eventual settlement, exceeded $600,000, significantly reducing the available assets for both parties. Major assets, such as the inherited property, had to be sold below market value due to the prolonged legal dispute, further diminishing the estate's value.

Conclusion
The Re Estate of Smith case underscores the importance of addressing inheritance issues promptly and with clear legal guidance during separation. The financial and emotional costs of such disputes can be high, making it essential for parties to understand their rights and obligations and seek legal advice early.

Lessons Learned

  1. Prompt Action is Crucial: Delays in addressing inheritance issues during separation can lead to significant financial losses and prolonged legal battles.

  2. Seek Legal Advice Early: Professional guidance can help clarify rights and responsibilities and prevent misunderstandings.

  3. Consider Future Needs: Courts will consider each party's future needs, so planning for the long term is vital.

  4. Understand the Legal Process: Knowing how inheritance is treated under NSW law can help manage expectations and outcomes.

  5. Document Contributions: Keeping records of how inheritance is used can support claims in a property settlement.

Statistics

  1. Inheritance Disputes: Approximately 15% of separation cases in NSW involve disputes over inheritance.

  2. Length of Proceedings: On average, inheritance disputes during separation extend the legal proceedings by 12-24 months.

  3. Legal Costs: The average cost of legal proceedings involving inheritance disputes in NSW ranges from $100,000 to over $600,000.

  4. Asset Reduction: Estates involved in inheritance disputes typically see a 10-20% reduction in value due to legal fees and prolonged proceedings.

  5. Court Involvement: In about 25% of inheritance disputes, court intervention is required to reach a settlement.

  6. Settlement Outcomes: Approximately 30% of inheritance disputes result in the inheritance being included in the marital asset pool.

  7. Mediation Success Rate: Mediation successfully resolves about 50% of inheritance disputes without court involvement.

  8. Emotional Impact: Studies show that 70% of individuals involved in inheritance disputes report high levels of stress and anxiety.

  9. Property Sales: Inheritance disputes result in forced property sales in about 40% of cases.

  10. Impact on Children: Inheritance disputes can significantly affect children, with 60% of cases involving disputes over child support or custody.

Essential Resources

Government Resources

Non-Profit Organisations