- James and Anna have been married for four years.
- They are saving for a deposit on a house. Currently, they have $70,000 savings in their joint account.
- Anna’s father dies and leaves her an inheritance of $200,000.
- Under the Property (Relationships) Act 1976 (“PRA”) Anna’s inheritance is classed as separate property, which means James has no legal entitlement to it.
- Anna is unsure of what to do with her inheritance so deposits it into their joint account in the meantime.
- James and Anna decide to use the $200,000 inheritance and $50,000 of their savings towards a deposit on a house.
- Anna’s lawyer suggests that Anna signs a Contracting Out Agreement to protect her inheritance but Anna declines.
- Unfortunately, James and Anna’s marriage doesn’t work out and they separate.
- James applies for an equal division of the relationship property.
- Anna’s inheritance is not protected and therefore included in the equal division of relationship property.
As a general rule, under the PRA, when a couple separates the relationship property is divided equally between them. An exception to this is a Contracting Out Agreement, which means that a couple enters into their own private agreement to determine how their property will be divided, thus the Act will not apply.
When separate property becomes relationship property
An inheritance is classed as separate property under the Act. This means that it is protected from a PRA claim and you solely possess legal entitlement to it. However, an inheritance can become relationship property when it is “intermingled”. Intermingling occurs when the separate property is combined with relationship property and it becomes unreasonable or impracticable to regard that property as separate property. Taking the scenario above, Anna’s inheritance is initially classified as separate property. But, by depositing it into their joint account and then using it together with their savings towards a deposit on a house the inheritance has “intermingled” with relationship property i.e. the deposit. It is now unreasonable and impracticable to regard the inheritance as separate property. The inheritance has become relationship property making it subject to James’s PRA claim.
If Anna had taken the advice of her lawyer and signed a Contracting Out Agreement her inheritance would be protected from an intermingling argument and James’s PRA claim for equal division of the relationship property. Anna would be able to retain her $200,000 inheritance. This is a common scenario, which highlights the importance of protecting your inheritance with a Contracting Out Agreement.
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