Inheritance laws in Canada are regulated by individual provinces rather than the federal government. In Ontario, the Family Law Act states that during divorce, couples must split assets accumulated during marriage 50%. Often, during a marriage, one or both spouses might receive a substantial inheritance.
Within divorce legislation, there is specific mention of how inheritance should be treated in the event of a marital separation. Typically, this keeps the inheritance protected from the other spouse, but there are exceptions that define whether it is treated as separate property or marital property. From the moment you receive an inheritance, understanding the legislation and how it operates will enable you to carefully protect your assets in the event of future divorce proceedings.
Distinction Between Marital Property and Separate Property
One of the most common questions raised in divorce proceedings concerns the division of property. As laid out in the Family Law Act 1990, assets and debts fall into one of two classifications: marital property and separate property.
Marital property is any property the married couple acquires during their marriage or acquired prior to the marriage but intended for use in the family home.
This includes assets acquired both jointly or separately by either spouse, along with any value growth from inflation or other factors. Most commonly, this property includes your family home, car, business, furniture, and money, among other things.
It’s important to note that marital property applies no matter the title holder of the property and includes debts of each spouse incurred during the marriage.
Separate property are items, assets, and debt that are excluded from the division of property. There are several forms of property that fall outside of marital property, even when acquired during the marriage. In particular, assets that were inherited or gifted and income generated from that source typically fall under separate property. In addition, life insurance proceeds and damages for personal injury are also eligible for exclusion.
It should be noted that there is still potential for inheritance to be considered marital property if commingled with joint assets. For example, you must clearly prove that cash inheritance is still in existence by keeping it separate rather than in a joint account. Plus, if you decide to use inherited money towards a family home or use an inherited property as a matrimonial home, then it can be classed as marital property. That would lead to the value being split equally at the time of divorce.
Is My Spouse Automatically Entitled to My Inheritance?
The general rule is:
Inheritance tax is usually considered separate property. It is not automatically shared with a spouse.
According to Simple Divorce, “In Canada, spouses are not entitled to each other’s inheritance. Inheritances are generally considered separate property, meaning that they exclusively belong to the inheritor.”
There are specific circumstances with inheritance that create exceptions to this rule.
Inheritance can be considered a marital asset when:
- Property is bought jointly by both parties using the inheritance.
- Inheritance funds are used to support the family or are required to pay off joint debts.
- A property is used as the marital home.
In any case, it all comes down to how inheritance was used during a marriage to understand whether it is subject to division or classed as separate property.
Understanding the difference between marital and separate property is particularly important when it comes to inheritance. Knowing the correct way to hold and manage your assets enables you to take proactive steps in protecting your inheritance while avoiding potential mistakes and complications.
Of course, in the long term, people rarely plan to get divorced, but you can still give yourself peace of mind knowing your inheritance is protected if managed wisely.
Protection of Inherited Property in Divorce
So, inheritance typically stays as a separate property but can be subject to division if it is used to improve the family home or joint expenses.
This makes it vitally important to understand actions that could break this protection of inherited property during a divorce.
For example, using the funds to pay off the mortgages on your family home or even to pay for family expenses can lead to the value of the inheritance being classed as part of the marital estate. Or if you hold inherited cash in a joint account, it becomes hard to trace its current value, making it impossible to prove the remaining value of inherited funds.
However, protections do cover liquidations, investments, or purchases an individual makes with inheritance. For instance, you could use inherited cash to buy property (except a marital home) and keep that asset excluded from the marital property as long as the original funds can be traced to this property. It is important to note that there is no protection for income received or appreciation on inheritance. For instance, income from rental, stock divided, or savings interest will be included in your marital assets. This applies even if the asset was received before marriage.
In this scenario, you might inherit a $100,000 vintage car prior to marriage. Over the years, its value has grown to $150,000. There’s a $50,000 gain during the marriage to which your spouse is eligible to half, $25,000.
Steps You Can Take to Protect Your Inheritance
Inheritance laws can be complex, especially when combined with divorce. Often, people are unaware of the potential pitfalls of how to manage their inheritance, leaving it at risk during divorce proceedings. Imagine your parents leaving you a nest egg, only to realize that during a separation, your spouse can take half. It creates a stressful and tumultuous situation.
The following steps will help you understand how to keep your inheritance safe from a divorce settlement. That way, if you do end up splitting family property during a divorce, you will have a clear distinction between family net value and inheritance value.
Keep inherited property separate
The ability to prove the source and value of your inheritance is paramount to protecting at the time of separation. Particularly when it comes to cash, it should always be kept in a separate account under your name. If it is deposited into a joint account with commingled funds, it won’t be excluded from the net family value. This is because it becomes impossible to prove what cash is inheritance and what is martial value.
Adding to this, even if cash is kept separately, you should avoid using it to pay for family expenses and property. If money is spent to support your spouse and family, it will also be part of the net family value.
Setting a clear financial barrier between family and inheritance funds makes the source and use of funds distinguishable.
Record the inheritance value
When you receive the inheritance, the value should be noted. This helps to provide a clear base value for cash or property before any increases or decreases occur over time. During a marriage, any savings interest earned, stock dividends, or income received on the inheritance form part of the net family value to be divided. To make the calculations easier and ensure the initial value is excluded, it is critical to record the valuations.
There can be tweaks to this ruling, such as in the situation where the deceased stated in writing that the inheritance should be excluded from the net family value. Remember, the law is nuanced, so it’s always wise to hire a qualified family lawyer.
Create legal agreements
The most robust way to make sure your inheritance is guarded is to use a prenuptial or postnuptial agreement. The legal document should outline exactly how the inheritance will be treated in the event of a separation and can take precedence over the standard laws.
It gives both spouses a clear legal framework in order to easily settle disputes and protect each other's assets, including gifts and inheritance.
Consult a Lawyer
When it comes to protecting your inheritance, it’s essential to contact an experienced family lawyer for advice.
Usman Sadiq, a Toronto divorce lawyer, is an expert in estate planning and spousal rights to inheritance. Usman and the team at Simple Divorce are professionally trained to provide an efficient, affordable option for divorce in Ontario. Their office provides a free consultation to all prospective clients to give a thorough explanation of the divorce process and inheritance.
If you need help protecting your inheritance during a divorce in Ontario, then contact Simple Divorce at (416) 901-7992 or learn more on their website.
