What Does Divorce Mean for Your Inheritance?

Inheritance in Divorce: Ontario’s Family Law Act

Under Ontario’s Family Law Act, when two people enter into a marriage, each spouse becomes automatically entitled to an equal share of the increase in value of property acquired during the marriage, subject to certain exceptions. This is known as the “right to equalization.” 

The right to equalization is triggered when the parties separate or when one spouse dies. Each partner then becomes entitled to one-half of the couple’s “net family property”, i.e., the value of the net property accumulated during the marriage and the value of the matrimonial home, notwithstanding that the home may have been acquired before the marriage. 

An important question for many individuals contemplating separation or divorce is how inheritance is treated during the equalization process.

The Ontario Family Law Act provides that any assets that a spouse inherits or receives as a gift from a third party during the marriage are excluded from the calculation of the individual’s net family property, provided that these assets have been kept separate and exist on the date of separation. An exception to this rule is the matrimonial home, which cannot be excluded from the calculation. 

In addition, any income or interest on property gifted or inherited from third persons after the marriage will be excluded, but only if the donor or testator has expressly stated that it is to be excluded from the spouse’s net family property. 

In contrast, the value of gifts or inheritances received by a spouse before marriage is deducted from the calculation of the individual’s net family property on the family law valuation date. For instance, if one spouse inherits $100,000 before marriage, and there is $50,000 remaining at the date of separation, $50,000 must be deducted from the couple’s net family property. 

Suppose the property acquired by a spouse as a gift or inheritance during the marriage has ceased to exist by the family law valuation date. In that case, no exclusion can be claimed unless the property can be traced to another property that exists on the valuation date. For example, if inheritance money was used to purchase a car and the car is still owned at the time of separation, the value of the car may be excluded. 

No exclusion will be allowed if the gift or inheritance has been co-mingled with other assets or been used to purchase a matrimonial home.

When Inherited Separate Property Turns Into Marital Property

Most times, inherited funds or gifts are excluded from the family assets or marital property even if you received them between your date of marriage and date of separation. Essentially, your inheritance is a separate excluded property that you could potentially hold on to after the divorce.

However, this separate property could become marital property if co-mingled with your marital assets.

For example, when you deposit your inherited money into a joint bank account that you use for family expenses and joint debts; or if you use your inheritance to pay for renovations or other family purchases, your separate property has now mixed, or co-mingled, with your marital assets and could be divided as such in the event of a divorce. 

However, family homes are an exception to the co-mingling rule. If you inherited a piece of real estate that you then used as a family home, it immediately becomes marital property.

How Can You Protect Your Inheritance from Your Spouse?

To protect your inheritance from a spouse in the event of a divorce or separation, you must take certain steps as soon as you receive the inheritance.

The main principle is to keep the inheritance as separate as possible from your joint assets. It’s also advisable to:

• Maintain proof that you have received an inheritance,
• Keep the money in a separate personal bank account,
• Avoid spending the inheritance funds on any jointly-owned property, and
• Do not use the inheritance to pay off joint debt

Contact Gelman & Associates for Family Law Advice in Canada

To find out more about your property division rights during separation or divorce, call Gelman & Associates at (844) 769-0737 or 1-844-742-0200 or contact us online for legal advice and a confidential initial consultation.

At Gelman & Associates, our experienced family law lawyers provide clients with the information they require to make educated decisions about the division of property upon separation or divorce. In addition to the extensive web-based resources available to our clients, all clients are given complimentary access to our firm’s webinar “Understanding Your Financial Statement – A Primer on Getting it Done.”