How do I protect my inheritance from my spouse or partner?

Sometimes we are lucky enough to receive a gift or inheritance from family members, either while they are alive or in death. If you are due to inherit money or other property, then you need to think carefully about how your inheritance might be impacted by the Property (Relationships) Act 1976 (Act). 

A common inheritance scenario:

• Bob and Sue have been married for 12 years. They own a house worth $1,000,000, which has a mortgage securing a debt of $600,000.
• Sue’s mother died and Sue received $750,000 from her mother’s estate.
• Sue uses her inheritance to pay off the mortgage and undertake renovations on the house.
• Sue does not get legal advice.
• Bob and Sue do not have a Contracting Out Agreement.
• Four years later, Bob and Sue separate.
• The house is now worth $1,500,000, mortgage free.
• On separation, Bob claims 50% ($750,000) of the value of the family home, as per his entitlement under the Act.

Unfortunately for Sue, her inheritance became relationship property when that was used to pay off the mortgage and increase the value of the house.

If Sue and Bob had signed a Contracting Out Agreement to protect the value of Sue’s inheritance, Sue could have preserved 75% or $1,125,000 of the now $1,500,000 home (her inheritance of $750,000 plus 50% of the balance as per her entitlement under the Act).

Relationship property vs separate property:

As you can see from the above, using inherited funds can have unintended consequences. Without a Contracting Out Agreement or careful planning, an inheritance can become “relationship property.” Once this occurs, it is not usually possible to convert these assets back to your separate property.

How can I protect my inheritance?

There are two ways you can protect your inheritance:

1. Contracting Out Agreement

A Contracting Out Agreement is an agreement that you and your partner sign agreeing to contract out of the terms of the Act, sometimes known as a “prenup” type of agreement. A Contracting Out Agreement can be signed at any point in the relationship, whether you are married or not. 

A Contracting Out Agreement can deal solely with your inheritance or if it is appropriate, you can extend this to deal with other assets.

To be legally binding, a Contracting Out Agreement must be signed and witnessed by both parties and each party must receive advice from separate lawyers. Your lawyer must also certify that they have advised you on the terms of the Contracting Out Agreement.

If your inheritance is significant and you want certainty that your inheritance remains your separate property, we recommend a Contracting Out Agreement as the best way to protect this.

2. Keeping your inheritance separate from relationship property

The alternative option to a Contracting Out Agreement is to keep your inheritance separate from your partner or spouse. This can be difficult to achieve in reality unless you are strict with the following practices:

(a) Place your inheritance in a separate bank account in your sole name, and do not use it for relationship purposes. For example, if funds from this account are used to purchase items used by the couple/family, those items then become “relationship property” and are shared equally on separation. Any bank account must not be used for your wages, salary and/or income from your work as this will intermingle it with “relationship property”, potentially causing the whole account to become “relationship property”.

(b) Acquiring an asset that is not for relationship purposes. This involves keeping assets you have inherited quite separate, so any assets you have inherited cannot be used for relationship purposes. Again, you cannot use your salary/wages/cash can be used to maintain or support these assets, you would have to maintain them from a separate account as above. You must also ensure that your spouse/partner does not undertake any work on the assets or contribute financially to the assets. The occurrence of any of these events could result in the assets losing its separate property status.

Preserving an inheritance can be achieved without a Contracting Out Agreement but it involves planning and a degree of discipline. A Contracting Out Agreement will provide certainty. 

If you would like assistance with preserving your inheritance, reach out to our relationship property team.