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Looking After Your Inheritance

Published: 15th February 2017

Author: Greg Kelly, Greg Kelly Law Ltd

Published in: Trust eSpeaking | Issue #48

Keep it protected

For many people a gift by Will (also known as a legacy) from a relative or friend can be very significant – both personally and financially. The relative or friend wants to show you kindness but also usually wants the gift to be of real benefit to you personally. The gift is not intended to benefit other parties such as creditors, the Official Assignee or a de facto partner, however, unless it’s protected, that can be the unintended outcome.

Relationship property claims

If you are a beneficiary under a Will and you’re married, in a civil union or de facto relationship, the gift (under the Will) is separate property (as opposed to relationship property). The difference is important because if your marriage or relationship breaks down or you die, your spouse or partner cannot claim half of the gift (or its proceeds) because it’s separate property which is not subject to the equal sharing regime under the Property (Relationships) Act 1976.

However, if your gift under the Will is intermingled with you and your spouse’s relationship property or it’s used for the benefit of relationship property (for example, by repayment of a joint mortgage over your family home) it may lose its separate character and may become relationship property.

Therefore, when you receive an inheritance and you’re either married or in a relationship, it’s good practice to open an account in your sole name to keep your inheritance separate. If you use your inheritance to clear a relationship debt, such as a mortgage, make sure it’s recorded as a loan that you can call up later or demand to be repaid if the need arises.

Alternatively you could set up a separate account in your own name before the estate is distributed so that the inheritance is kept separate from other assets. You can then ask the trustees to pay the inheritance into that account when the time comes.

Creditors and the Official Assignee

If you receive a gift by inheritance it becomes an asset which is available to your creditors. If you are bankrupt at the time the estate is distributed, the gift will pass into the hands of the Official Assignee to be used to pay your creditors.

If you’re making your Will and know your intended beneficiary may have financial problems or be exposed to potential claims by creditors because, for example, they operate a business or have signed a guarantee or a lease, you should consider altering your Will to take this into account. This will ensure your gift goes to a family trust set up for your beneficiary and their family rather than the beneficiary personally.

Alternatively, a trust can be set up in your Will for the benefit of your beneficiary and their family rather than a gift directly to the beneficiary.

It’s easy for a beneficiary to lose the benefit of a gift intended by a relative or friend. The gift can, however, be protected by careful planning and communication between the Will-maker, the beneficiary and the person who prepares the will.

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