Accountants: Gifts and Inheritances – How Are They Treated in a Property Settlement?

If you aren’t familiar with how gifts and inheritances are treated as part of a divorce settlement, we have put together a list of key points to help give some clarity so you can give the best possible financial advice to your clients who find themselves in this situation.

Is it a gift or inheritance?

There is usually a clear difference between property that is received as a “gift” compared with an “inheritance”. However, I’ve had client’s in the past indicate to me that they have received an “inheritance” and when I have explored the nature of that “inheritance” it has come to light that the property has been received prior to anyone passing away (i.e. it was not received under someone’s Estate). In fact, in some instances there has been no expectation that the person providing the funds was likely to pass away any time in the near future either. 

Therefore, even though the funds might have been “inherited” in some form or described as such, in actual fact what was being considered was, for the purposes of their legal matter, more appropriately considered a “gift”. 

The learning from this example is that it is important to take information presented to you by your client and to delve deeper into the factors that may need to be considered, rather than simply accepting everything, at face value, that your client is telling you. Normally this is an unintentional (although not always) misuse, or a nuanced difference, in terminology. 

When someone receives an inheritance, it is usually clear who is receiving the property. More often than not an inheritance is provided to one of the parties to a relationship, rather than both parties, although there may also be occasions when an inheritance is intended to be received by both parties to the relationship. 

A gift can often be more tricky to identify exactly who the gift has been provided to as there is often a lack of documentation and this often leads to arguments as to whether the gift has been left to one party solely vs. the parties jointly.

Furthermore, parties often argue about whether funds have been provided as a gift or as a loan. We then have to consider what the intention was at the time those funds were provided and whether this can be established in any meaningful way. It can be difficult to get documentation to support a position and more often than not there is no paperwork and instead there were simply verbal discussions. Even then, people can often have different views about what was said, or they are not entirely honest. 

As lawyers we are constantly assessing and reassessing how and when property has been received, the nature of the funds / assets / property, as well as how it has been applied and the significance of those factors for our client or the other party. 

Timing of a gift or inheritance

Disputes also arise, during the course of property settlement negotiations, about the timing and the consequential significance to the way in which the gift or inheritance should be treated. It is possible for a gift or inheritance to be received at any stage. For example, it might occur prior to the relationship commencing, during the relationship or even after separation. 

Part of our role as lawyers is determining when these funds were received and how much weight, if any, should be given to the receipt of those funds.

Generally speaking all of the assets, liabilities and superannuation interests of the parties are capable of being taken into account by the Court. The time for assessing what property should be included and the value is the date the matter is resolved (or if unresolved at the time of a final hearing), not at the date of separation.

For this reason any gifts or inheritances received after separation are capable of being taken into account by the Court. Having said that, there will then likely be consideration to the fact that the person receiving the funds has been the sole contributor to those funds and that a “two pools” approach may be adopted given there is unlikely to have been any contribution to the receipt of those funds by the other party. 

In respect of gifts or inheritances received prior to or in the early stages of a relationship, particularly in longer relationships, it is likely that these funds will be treated in the same way as an initial contribution and therefore the weight to be given to that gift or inheritance might erode over time. Depending on the way that gift or inheritance was utilised it may also give rise to an argument that the funds were the springboard that effectively allowed the parties to accumulate further wealth. 

How has the gift or inheritance been used and is it easily identifiable?

How gifts or inheritances have been applied and whether they can still be easily identified are also relevant factors. For example, it may be that those funds have never been touched and are just sitting in a bank account or in the form of investments. More often than not, people will use those funds such as to acquire property, to make improvements, to pay debts, to meet living expenses or a combination of the above. 

The only problem with this is, the gift or inheritance goes ‘through the washer’ and it becomes difficult to determine where those funds are now and therefore what this means in terms of the weight that should be given to it relative to the size of the property pool. The extent of that contribution then becomes quite murky.

How are impending inheritances treated in divorce?

I frequently have clients asking about the implications of any inheritance they receive in the future and how this may be impacted as a result of their separation discussions. Otherwise, I have clients who believe the other party may shortly be in receipt of an inheritance and want to know how that will be treated as part of their property settlement.

Again, the important factors for us to understand at that point are things such as the size of any inheritance that may be received and the consequential impact this may have to the property pool. For instance, it might be fairly small relative to the overall property pool or it could have a substantial impact. It is also important to understand whether the receipt of those funds is imminent (i.e. if it is being received as part of an Estate as the person passed away already or is the receipt of those funds imminent).

It is important that we are advising our clients about their disclosure obligations at this point in time to minimise the risk of any agreement reached being set aside in the future on the basis of failing to provide this relevant information.

Having said the above, if there is no indication that one party is likely to receive an inheritance at the time of settlement discussions, then it is unlikely that any inheritance received after a settlement has been reached, can be clawed back or claimed by the other party. This is because the settlement agreement is intended to be final. Property settlements are also notoriously difficult to set aside.

As an accountant, it is important you have your client notify their lawyer about these sorts of facts. That way we can give them advice about their obligations and what they should be doing in terms of disclosing information.

If you have a client who is going through a property settlement, and they are not sure what to do about their inheritance or gift, make sure they get in touch with their family lawyer as soon as possible.