Inheritances and Gifts: How to protect your assets
Not all property is treated equally in family law. Inheritances and gifts from third parties receive special treatment when determining the division of property for married spouses.
The regime governing property division for married couples in Ontario is found in section 1 of the Family Law Act. Equalization is determined by having the spouse with the higher net property (the higher net worth accumulated over the marriage) pay half the difference of the parties’ respective net worth to the other.
Certain assets are excluded from equalization, namely inheritances and gifts from third parties. Complications (and more often, disappointment and surprise) can arise when a separated spouse learns that an inheritance or gift that was put into a joint asset loses some, or all of this exclusion. Particularly, if a spouse used an inheritance or a gift to fund the purchase of a matrimonial home (and there can be more than one matrimonial home i.e. a vacation property that is regularly used by the family), the spouse loses the ability to claim the exclusion and is required to divide the entire value of the property with their spouse. The loss of the exclusion occurs when inherited or gifted funds are used to purchase, renovate or pay down a mortgage for jointly owned property. Similarly, if you put a monetary gift or inheritance into a joint bank account, you risk losing half of the exclusion for the gift or inheritance. Unless your spouse agrees that these funds should be credited to you, and unless equalization would otherwise be unconscionable (shocking to the conscience), you will not recover the full value of the gift or inheritance.
If you acquire a gift or inheritance before the marriage, the increase in the value of this property will be included in your net worth. This will require that you establish the value of the gift or inheritance on the date of marriage and on the date of separation.
To best protect yourself, in addition to entering into a marriage contract which specifically addresses these issues, it is preferable to put monetary gifts or inheritances into a separate bank account that is solely owned by the recipient. If you chose to invest the funds, make sure that you can trace where the inherited or gifted funds went, to preserve the exclusion.