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Divorce can be complex and emotionally taxing, particularly when significant financial assets are involved. One area that often leads to confusion and conflict is the treatment of inherited wealth. For individuals in Ontario who have received or expect to receive an inheritance, understanding how to protect that wealth in the event of a marital breakdown is crucial. Ontario family law provides certain protections for inherited property, but there are important exceptions and procedural requirements that can complicate matters.
Equalization of Net Family Property in Ontario
Ontario follows the principle of equalization of net family property when a marriage ends. This means that each spouse is entitled to an equal share of the increase in family property accumulated during the marriage. To determine this, both spouses calculate their net worth on the date of separation and subtract their net worth on the date of marriage (excluding certain exemptions). The spouse with the higher increase in net worth typically pays the other spouse half the difference.
The equalization process does not necessarily result in the physical division of property. Instead, it results in a monetary payment meant to balance the gains each spouse made during the marriage. However, certain property types are excluded from this calculation, including inheritances in some circumstances.
Are Inheritances Excluded from Equalization?
Under Ontario’s Family Law Act, inheritances received during the marriage are excluded from the equalization calculation, provided the funds or property are kept separate and identifiable at the time of separation. However, if the inheritance has been mixed with joint assets or used to purchase the matrimonial home, it may lose its exempt status.
For example, if an individual receives a $200,000 inheritance and places it in a separate bank account in their name only, that amount can generally be excluded from the equalization process. On the other hand, if the same funds are used to pay off the mortgage on the matrimonial home or are deposited into a joint bank account, the exemption may no longer apply.
Special Rules for the Matrimonial Home
Under Ontario family law, the matrimonial home holds a unique status. Regardless of how ownership is registered or how the home was paid for, the full value of the matrimonial home must be included in the equalization calculation. Even if one spouse used inherited funds to purchase the home or pay down its mortgage, the value of those contributions cannot be excluded.
This rule often surprises individuals who believe they have protected their inheritance by using it for a tangible asset. Unfortunately, once an inheritance is invested in the matrimonial home, it is no longer treated as exempt property. This can have significant financial consequences in high-net-worth divorces.
Proactive Steps to Preserve Exempt Status
To protect inherited wealth from equalization, individuals should take proactive steps to maintain the exemption. One of the most important is keeping inherited funds separate and not using them to purchase or improve the matrimonial home. Creating a separate bank or investment account in the inheriting spouse’s name is prudent.
In addition, thorough documentation is key. Individuals should retain clear records showing the source of the inheritance, including wills, trust documents, and bank statements tracing the funds from the estate to the recipient. If multiple transactions occur over time, maintaining a paper trail that proves the inheritance was not co-mingled with family assets is essential.
Another protective measure is entering into a domestic contract, such as a marriage contract (commonly known as a prenuptial agreement) or a postnuptial agreement. These contracts can specify how inheritances will be treated in the event of a separation and provide a layer of legal protection beyond the statutory exemptions.
Gifts and Inheritance Received Before Marriage
Inheritances received before marriage are treated differently under Ontario law. While they may not be excluded from the equalization calculation outright, they can affect the calculation of a spouse’s net worth on the date of marriage. In other words, if a spouse owned inherited assets at the time of marriage, those assets are credited as part of their initial net worth and deducted when calculating the increase in wealth during the marriage.
However, individuals must be able to prove the value of inherited assets on the date of marriage. Failing to provide reliable evidence, such as appraisals, account statements, or other financial records, can result in those assets being omitted from the date-of-marriage deduction. As a result, even pre-marital inheritances can become subject to equalization without proper documentation.
Trusts and Beneficial Interests
High-net-worth individuals often receive inheritances through trusts. The treatment of trust property in divorce can be complex and depends on various factors, including the degree of control the beneficiary has over the trust and the nature of the interest.
If a spouse has a mere expectancy to receive a benefit from a trust, that interest may not be included in the equalization process. However, if the spouse has a fixed or vested interest or the trust has regularly provided income or assets during the marriage, it may be considered property for equalization purposes. Courts will examine the trust structure and the extent to which the beneficiary exercises control or receives benefits.
Because trust law and family law intersect in nuanced ways, individuals who are beneficiaries of trusts should seek legal advice early in the process. Proper structuring and legal counsel can be instrumental in shielding trust assets from division in the event of a divorce.
Impact on Spousal Support
While inheritances can sometimes be excluded from property equalization, they may still influence spousal support. The Family Law Act and the Divorce Act consider the means and needs of each spouse when determining entitlement and the amount of support. If one spouse receives a substantial inheritance, that wealth may be considered a financial resource that affects support obligations.
Spousal support awards are based on several factors, including the recipient’s financial need, the payor’s ability to pay, the length of the marriage, and the parties’ roles during the marriage. Even if inherited wealth is exempt from division, courts may still consider it when determining whether support is appropriate.
The Importance of Seeking Legal Advice Early
Protecting inherited wealth requires foresight and strategic planning. Ontario family law does provide mechanisms for safeguarding inheritances, but these protections are not automatic. Individuals who have received or expect to receive an inheritance should consult a family lawyer to review their circumstances and determine the best course of action.
Legal advice is critical in situations involving:
- Co-mingling of inherited funds
- Use of inheritance for the matrimonial home
- Inheritance received through trusts
- Complex financial structures
- Potential support claims based on inherited wealth
A skilled lawyer can help draft domestic contracts, structure finances, and ensure proper documentation is in place to preserve the exempt status of inherited property.
Johnson Miller Family Lawyers: Providing Innovative Property Division Solutions in Windsor
Inherited wealth can be a sensitive and significant issue in Ontario divorces, especially among high-net-worth couples. While the law provides a degree of protection for inheritances, these protections can easily be lost without careful planning.
At Johnson Miller Family Lawyers, we understand how the equalization process works, the special status of the matrimonial home, and the importance of documentation. Our skilled family and divorce lawyers help clients navigate these issues and create agreements protecting their inherited assets. When conflicts arise, we also advocate for clients in all forms of dispute resolution processes (including mediation and litigation). To book a consultation, please call 519-973-1500 or contact us online.
