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Your inheritance. Your parents' legacy.
You want to use your inheritance to benefit your family. But you also want to honour what your parents intended. Here is how to do both.
Inheritances are generally protected.
Under the Property (Relationships) Act 1976, inheritances are generally classified as separate property, meaning they remain yours and are not subject to equal division if the relationship ends.
However, this protection is not as robust as many people assume. There is a critical exception that catches many families by surprise.
The critical exception
If an inheritance is "intermingled" with relationship property, it can lose its separate status. The most common way this happens is using an inheritance to pay down the mortgage on your family home or depositing it into a joint account.
The mortgage pay-off trap.
You receive an inheritance and, sensibly, want to use it to reduce your mortgage. Lower payments, less interest, more financial security. What could go wrong?
Your Inheritance
Separate Property
$200,000
Family Home
Relationship Property
Pays down mortgage
Result: Intermingled
Your inheritance has been converted from separate property into relationship property. It becomes part of the home's value and will be divided equally.
Example scenario
Sarah inherits $200,000 from her mother. She and her partner Mark own a home worth $800,000 with a $400,000 mortgage. Sarah uses her inheritance to pay off half the mortgage.
Five years later, they separate. The home is now worth $1,000,000 and is mortgage-free.
Without a contracting-out agreement:
Sarah receives $500,000 (her half) instead of the $700,000 she might have expected.
Sarah has effectively given away $100,000 of her mother's legacy.
What your parents might expect
For many people, this is not just about money. It is about honouring their parents' wishes. When your parents left you an inheritance, they probably intended it for you and your descendants, not to be divided with a partner who may no longer be in your life.
Some parents discuss this explicitly. Others assume the law will protect the inheritance. Many families have difficult conversations about this topic, particularly when significant wealth is involved.
If your parents are still alive and you expect to receive an inheritance, having an open conversation about their wishes can help. A contracting-out agreement can then reflect those intentions.
Options for protection
Each option has trade-offs. The right choice depends on your circumstances.
Keep it completely separate
Do not use the inheritance for joint purposes at all. Keep it in a separate account in your name only.
Maximum protection. No intermingling issues.
You cannot use the inheritance to benefit your family during the relationship. The money sits in a separate account.
Use a family trust
The inheritance stays in a trust, which can benefit your family while maintaining some separation.
Can provide ongoing benefit while maintaining structure.
Courts can look through trusts. Protection is not guaranteed. Trusts have costs and administrative requirements.
Get a contracting-out agreement
You can use the inheritance however you like while agreeing that its value remains yours.
Maximum flexibility with maximum protection. You can use the inheritance for your family while protecting its value.
Requires your partner to agree and get independent legal advice. Both parties must be comfortable with the arrangement.
For most people who want to use their inheritance for family purposes, a contracting-out agreement offers the best balance of protection and flexibility.
What an agreement can do
A contracting-out agreement can specifically address your inheritance:
-
Protect existing inheritances
Confirm that an inheritance you have already received remains your separate property.
-
Protect future inheritances
Extend protection to inheritances you expect to receive.
-
Allow controlled use
Specify that even if you use the inheritance for the family home, its value remains yours.
-
Protect growth
Agree that investment returns or growth on the inheritance remain separate property.
Having the conversation with your partner
This can be a difficult conversation, but it does not have to damage your relationship. Many couples find that discussing these matters openly actually strengthens their partnership.
Ways to frame the conversation:
- " My parents worked hard for this money and I want to honour what they would have wanted
- " I want to use this money for our family, but I also want to make sure it stays in my family line for our children
- " This is not about not trusting you. It is about being responsible about family wealth
- " If you received an inheritance from your parents, I would support you doing the same thing
Act before you use the money
If you have received or expect to receive an inheritance, the ideal time to get a contracting-out agreement is before you use the money. Once it has been intermingled, the situation becomes more complicated.
This does not mean it is too late if you have already used some of your inheritance. An agreement can still be valuable, but tracing and documenting the inheritance becomes more important.
Key Takeaways
- Inheritances can lose their protected status if intermingled with relationship property
- Using an inheritance to pay down your mortgage is a common trap
- A contracting-out agreement lets you use the inheritance while protecting its value
- Having the conversation is about responsibility, not distrust
- Acting before you use the money is ideal, but not required
Related Guide
Understand how relationship property law treats inheritances and what protection options you have.
Read the Where Do I Stand? GuideRelated Reading
Is a Prenup Right for Your Relationship?
Deciding whether a contracting-out agreement is right for you. Questions to ask yourself, signs you should consider one, and myths debunked.
Trusts and Relationship Property: What You Need to Know
Why trusts alone may not protect your assets from relationship property claims, how courts can 'look through' trusts, and what actually provides protection.