Spouses must be cautious when it comes to inheritances. When one spouse receives an inheritance during the marriage, it can give rise to complex issues. There are things a spouse can do to protect their inheritance in the event of a divorce—and major risks if they don’t.
Our knowledgeable family law lawyers can provide you with valuable insight as to how an inheritance is affected by divorce in British Columbia and how to protect inheritances received by a spouse. If you want to know more about how an inheritance will be affected during a separation or divorce, or how to safeguard an inheritance before or during marriage, reach out to Onyx Law Group.
In this blog, we provide you with information about inherited property, what happens when a spouse receives an inheritance, and how to protect inherited assets.
What Is Inheritance Law?
Inheritance law governs the assets passed down to an individual or group of individuals (known as beneficiaries) from a deceased person, usually through a will or legal document. These assets can include money and savings, real estate, personal property, stocks and investments, or other assets. An inheritance can be received from a deceased person whether they die intestate (without a will) or testate (with a will).
What Happens When Your Spouse Receives an Inheritance?
When your spouse receives an inheritance from someone else (e.g., inheritance money from their parent), they may need to share some or all of it with you if you later separate. That may occur even if the person who left the inheritance to your spouse intended for it to belong only to your spouse.
Understanding Separate vs. Marital Property
The basic rule in the Family Law Act is that property and debt are split equally between spouses on separation. In other words, when spouses separate, net family property is subject to division 50/50 between spouses, unless a mutual agreement states otherwise, or the court finds that equal division would be significantly unjust.
Marital property is divided into two categories: family property and excluded property. Family property encompasses all assets owned by either spouse at the time of separation, irrespective of ownership titles. Examples of family property include separately purchased assets, joint property, the matrimonial home, RRSPs, investments, bank accounts, and other assets, regardless of whether the assets are jointly owned or owned by only one spouse.
“Separate” or “excluded property” is not subject to equal division in the event of a divorce. An inheritance received by one spouse is normally categorized as excluded property. Property brought into the marriage by one spouse and gifts received by one spouse from a third party are also typically considered separate property.
In the context of divorce, the spouse claiming that property is excluded property is responsible for demonstrating that the property is indeed excluded property.
Does an Inheritance Need to Be Split in a Divorce?
While excluded property is presumed to remain the property of the spouse who owns it, sections 84 and 85 of BC’s Family Law Act make it clear that the increase in value of the excluded property is subject to equal division on separation. That means any increase in the value of inherited property over the course of the relationship is subject to equal division during divorce proceedings (subject to the applicability of any of the exceptions discussed below).
Imagine your spouse inherits a home worth $1 million either before or during your marriage. The home is worth $1.5 million when you separate. The original inheritance value of $1 million is excluded property, but the $500,000 increase in value is subject to division 50/50.
When Does Inheritance Become Marital Property?
It’s possible for the full value of an inheritance received by one partner to lose its exclusion and become marital property. For example, if an inheritance during the marriage is co-mingled with marital assets or used to purchase property in joint ownership with your spouse, the inheritance can become marital property subject to equal division if you separate.
Using the Inheritance for Marital Expenses
Inherited funds are considered separate property as long as the funds are kept separate during the marriage. If an inheritance received by one partner is used to pay off joint debt or deposited into a joint bank account (making it available for both spouses to use), the inheritance loses its character as excluded property.
Similarly, if inherited funds are used to purchase a family home that both spouses live in, or inheritance money is used to pay for the mortgage, repairs, and upkeep of the matrimonial home, BC courts have generally held that the exclusion is lost, so that the spouse who received the inheritance doesn’t get to claim it back if the spouses later divorce.
Legal Protections for Inheritances
The Family Law Act was recently amended to strengthen and clarify the rules respecting excluded property. The 2023 amendments state that the property exclusion will still apply even if the property’s legal or beneficial ownership was transferred from one spouse to another. For example, if one spouse receives an inheritance and uses it to purchase real estate in both spouses’ names, its excluded character may not be lost if the spouses later separate. The inheritance can be traced back to the excluded property of the spouse who received the original inheritance.
Impact on Divorce Settlements
The amendments to the Family Law Act are relatively new and it remains to be seen whether it will make it simpler for inheritances to be considered separate property regardless of how a spouse uses the inheritance. The best course of action is for a spouse receiving an inheritance to take steps to protect it, whether the inheritance is received before or during the marriage.
How to Protect Your Inheritance from A Spouse
Here are some of the strategies a spouse can use to protect an inheritance in the event of a divorce.
1. Maintain clear documentation
Keep proof that you received an inheritance (e.g., a copy of the will; correspondence from the executor setting out the inheritance), and proof of the value of the inheritance at key dates, including the date of marriage.
2. Understand the terms of the will
Read the will carefully. The will-maker may have expressly stated in the will that if the inheritance generates income, that income or interest is excluded from the beneficiary’s net family property.
3. Keep the inheritance separate
Open a separate account in your sole name to deposit inheritance funds and interest income earned from it. If you inherit property or other assets, keep them in your sole name. Avoid using the inheritance for shared expenses or things like family vacations.
4. Avoid commingling of inherited funds with marital assets
If you buy property with inheritance money or sell inherited property and use the proceeds to purchase other property, keep it in your sole name. Keep documents to prove what you purchased and that you purchased it using inherited funds.
5. Don’t use inherited money for the matrimonial home
Do not use inherited funds as a down payment or to buy a home that you live in with your spouse. Do not use inheritance money to pay off the mortgage on the family home or to pay off any joint debt, and don’t use your inheritance to renovate or improve the matrimonial home.
6. Consider a contract
A written agreement can be prepared and signed by both spouses, either before or during the marriage, to safeguard an inheritance. These agreements are discussed in more detail below.
7. Consult a professional lawyer on how to protect your inheritance
Every situation is unique. Legal advice from an experienced family lawyer customized to your circumstances is the best way to safeguard an inheritance and preserve its status as excluded property in the event of a separation.
The Power of Prenuptial and Postnuptial Agreements
Written contracts can be prepared to protect assets, including inheritances received and/or anticipated inheritances.
If you are planning to get married, speak to a family lawyer about a prenuptial agreement (before marriage). If you are already married, a postnuptial agreement (after marriage) can be prepared by a family law lawyer to detail how assets will be divided should a divorce occur.
The prenuptial agreement or postnuptial agreement can be customized to your needs, wishes, and what you and your spouse agree is fair. For example, the agreement may stipulate that one spouse’s inheritance is excluded, the increase in value is excluded, and if the inheritance generates income or interest, that is excluded as well.
Alternatively, the spouse who received the inheritance may want some flexibility. They may want to use some or all the inheritance funds to buy a home with their spouse, improve a home that is jointly owned with their spouse, or invest in a family business, for example. A prenuptial agreement or postnuptial agreement is very highly recommended to preserve inheritance funds as excluded property despite commingling or investing in joint property.
Is My Spouse Entitled to My Inheritance When I Die?
Your spouse may get some or all of your inheritance after your death, depending on several factors, including what is specified in your will.
If a spouse attempts to disinherit their spouse or fails to make adequate provision for their spouse in their will, the surviving spouse can bring a wills variation claim or elect to instead have a division of net family property under the Family Law Act after their spouse’s death.
If the deceased spouse died without a will, the surviving spouse will automatically inherit as first in line under British Columbia’s laws of intestacy. The amount the surviving spouse receives depends on whether the deceased had dependents.
Our team of family lawyers and wills and estate lawyers are uniquely positioned to advise you on your legal rights and options. Contact Onyx Law Group today for trusted legal advice and customized solutions to ensure your final wishes are effectively documented.
Other considerations
Emotional and Psychological Impact
You may have a strong emotional response to receiving an inheritance. The inheritance may cause strain in the marriage or disputes about what is fair. Prepare as best you can by seeking professional counselling and/or legal advice to address issues.
Communication
Open communication between spouses is the key to avoiding inheritance disputes. Be transparent with your spouse about an inheritance you have received or expect to receive so that you can agree on what is fair. It’s much easier to come to an agreement when your relationship is going well than it is to battle it out after your relationship has broken down.
Tax Implications and Financial Planning
Income taxes and probate fees are applied before the estate is distributed to the beneficiaries named in a will (or to heirs if the deceased died without a will). In other words: the inheritance received is not taxable in your hands because it has already been taxed as part of the deceased person’s estate.
That being said, there may be tax implications depending on what you choose to do with an inheritance. Long-term financial planning, investment strategies, and tax advice are recommended before you purchase property or make investments using inheritance funds.
Need to Consult a Family Law Lawyer?
No one wants to think about divorce at the beginning of a marriage or during a marriage, but it is important to consider how your assets or an inheritance could be impacted should a divorce occur. There are ways to protect your assets or inheritance such as with a prenuptial or postnuptial agreement.
Onyx Law Group’s team of experienced family law lawyers in Vancouver offers hands-on estate and family law experience. With extensive experience in navigating the complexities of inheritance law and divorce proceedings, we ensure the effective protection of your inheritance in case of divorce.
We welcome you to contact us today for trusted legal advice and customized solutions.