How to Protect your Inheritance from Separation or Divorce
December 5, 2019 By: Alice Weatherston Read Time: 4 minutes
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If you have received an inheritance from a loved one, chances are it was intended for you personally, and not your spouse.

However, if you are not careful with what you do with the inheritance you could be required to share it with your spouse if you separate or divorce.

Receiving an inheritance while married

Every circumstance is different, and you should get advice tailored to your particular circumstances. But some general recommendations are set out below.

Normally your inheritance is excluded

When married spouses separate, there is usually a payment made by the spouse whose property has grown the most. We calculate each person’s ‘net family property’ which is essentially the increase in value of their property during the marriage.

If you received an inheritance before marriage, you get credit for the balance of the inheritance you had on the date of marriage. Depending on the language in the deceased person’s Will (the person who left you the inheritance), the growth of the inheritance may also be excluded from your net family property.

If you are not careful with what you do with the inheritance you could be required to share it with your spouse if you separate or divorce.

If you received your inheritance during the marriage, then you can exclude the value of the inheritance you have left on the date of separation from your net family property. Which means you do not share the value of the inheritance you still have on the date of separation.

Protect your inheritance – received prior to marriage

If you received it before the date of marriage make sure you document and keep proof that you:

  • received an inheritance. For example, keep the Will and any letters from the Estate Trustee confirming what you will receive;
  • opened a separate account, in your sole name, for the inheritance;
  • keep proof that you deposited the inheritance into the account;
  • keep proof that of the balance of the inheritance on the date of marriage. If the inheritance was in a bank account on the date of marriage, keep a copy of the bank statement showing the balance. If the inheritance was invested into other assets, keep proof that you purchased assets with the inheritance, and the value of those assets on the date of marriage. This information can be very difficult to find years down the road, so do it right away.
  • If the Will says you can exclude interest income earned from the inheritance (which most Will’s drafted by a lawyer do), keep the inheritance and interest earnings in a separate account.
  • Do notinvest the money you inherited into a home you will be living in with your spouse (this includes not paying down the mortgage). If you do, and if you still live with that spouse in that home on the date of separation, you lose your deduction.
  • Do not use the inheritance to pay off any joint debt.
  • Do not deplete the inheritance until after you are married.

Protect your inheritance received during the marriage

To protect your exclusion for an inheritance received during the marriage, you should:

  • still document and keep proof that you received an inheritance;
  • open a separate account, in your sole name, for the inheritance;
  • keep proof that you deposited the inheritance into the account;
  • do not use the inheritance to buy jointly owned assets with your spouse;
  • To the extent possible, do not deplete the inheritance
  • Do not use the inheritance to pay off joint debt;
  • Do not use the inheritance to buy a home you will live in with your spouse, and do not use the inheritance to make improvements to the house you are living in or pay down the mortgage;
  • if you use the inheritance to buy assets, don’t buy depreciating assets. You only get to exclude the value of the account or assets traceable to the inheritance that still exist on the date of separation.
  • if you use the inheritance to purchase assets, make sure you keep documents proving that those assets were purchased with funds from the sole account where the inheritance is held.

Marriage contact

The above recommendations can be very restrictive on how you can use your inheritance and also protect it. In particular, many people want to buy a house with their spouse, or make improvements to the home they live in. If you want to use the inheritance, rather than keeping it in an account in your sole name, you should strongly consider entering into a marriage contract which can help you protect your inheritance with a bit more flexibility..

What if I’m not married?

Common law spouses should also be mindful of ways to protect their inheritance.

Unlike, married spouses, common law spouses are not entitled to equalize property (share in the growth of each other’s property during marriage). But common law spouses can still bring property claims against each other under equitable remedies such as unjust enrichment.

Every circumstance is different, and you should get advice tailored to your particular circumstances. But some general recommendations are set out below.

If you are not married, and want to protect an inheritance, you should:

  • Keep proof received an inheritance. For example, keep the Will and any letters from the Estate Trustee confirming what you will receive;
  • open a separate account, in your sole name, for the inheritance;
  • keep proof that you deposited the inheritance into the account;
  • If the inheritance is invested into other assets, keep proof that you purchased assets with the inheritance.
  • Do not invest the money you inherited into any joint assets with your partner.
  • Don not use the inheritance for joint day to day expenses.
  • Do not invest the money you inherited into the home you will be living in with your spouse.
  • Do not pay down the mortgage on jointly owned property, or the home you live in with your spouse.
  • Do not pay down joint debts.

Cohabitation Agreement

The above recommendations can be very restrictive on how you can use your inheritance and also protect it. In particular, many people want to buy a house with their spouse, or make improvements to the home they live in. If you want to use the inheritance, rather than keeping it in an account in your sole name, you should strongly consider entering into a cohabitation contract which can help you protect your inheritance with a bit more flexibility.

Ultimately, the parameters contained within either a marriage contract or cohabitation agreement are key to determining what happens to your inheritance if you become separated or divorced from your spouse. If you have any questions about protecting your inheritance, contact our Family Law group to speak to a qualified family lawyer.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2020 Nelligan O’Brien Payne LLP.

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