Received an Early Inheritance? Learn How to Protect it in a Divorce
Early inheritances are becoming more routine lately, and are coming up for discussion in families more often. Perhaps your aging parents have earmarked some Estate funds for you, and are thinking about putting them in your hands now, before their inevitable passing. That way, you can enjoy it sooner rather than later.
This kind of unexpected windfall can provide you with a significant financial boost, especially if you are married with children of our own. It might help you put a down payment on a larger home, pay off some lingering debts, or maybe take that long-postponed family vacation.
But if your marriage is on the rocks, there are some important things to know, and some key pitfalls to avoid. That’s because of how the law treats your inheritance if you and your spouse end up divorced.
The Legal Framework: Marital Property vs. Excluded Property
In Ontario, Family law and property division rules offer some key strategies that can help you legally safeguard any early inheritance you receive.
When any couple divorces, their matrimonial property – meaning the assets and debts accumulated during their marriage – are typically divided equally under the regime set up by the provisions of the Ontario Family Law Act. However, some assets are considered “excluded property,” meaning their value (but importantly, not any increase in their value) does not have to be shared with your spouse upon divorce.
If you’ve received some sort of inheritance, it forms one of these exclusions. The funds retain their excluded character as long as they are kept separate from your shared spousal or family assets.
Related: What is Considered Marital Property?
How do I protect my inheritance money?
When it comes to protecting your inheritance, especially in the event of a divorce, there are several strategies you can consider to ensure your assets remain separate. By keeping your inheritance distinct from marital property, utilizing legal tools like trusts, and drafting prenuptial or postnuptial agreements, you can safeguard your financial future. In the following sections, we will explore these methods in detail, offering practical advice on how to maintain the integrity of your inheritance and prevent it from being subject to division.
Related: How to Protect Family Inheritances
Keeping the Inheritance Separate
With this in mind, the key way to protect your inheritance in the event of a future divorce is simply to keep it separate from your marital property. Here are some tips in that regard:
- Maintain Separate Bank Accounts: Deposit your funds in a separate bank account that is solely in your name. This reduces the risk of the inheritance being seen as a marital asset. Make sure that the account is never used for shared household expenses or joint purchases.
- Avoid Using Inheritance for Family-Related Expenses or Investments: If the inheritance is used to purchase assets that benefit both you and your spouse and children, such as a home or a car, it may be considered a joint asset and lose its excluded status.
- Keep Detailed Records: Make sure you have clear written documentation, showing that you kept the funds separate. Keep any receipts, bank statements, and other relevant correspondence. In a divorce, you may need to prove that the funds were kept separate from other marital finances, and were always intended to be so.
Trusts as a Protection Strategy
Another effective way to protect an inheritance from divorce is to have your parents set up a family trust. This involves setting up what is know as a legal trust inter vivos (between living individuals). The trust holds your inherited funds for your benefit, and ensures they remain legally separate from your marital property. This is often a great solution if there is a family business, a private company with shares, or other significant assets that are being passed down from your parents to you.
Although there are different types of trusts, an irrevocable trust is often the best, since it cannot be altered or revoked without the consent of the beneficiaries. The terms of the trust can also specify that the inheritance is intended solely for you as the recipient, and not for any joint marital use with your spouse.
Prenuptial and Postnuptial Agreements
A prenuptial agreement (signed before marriage) or a postnuptial agreement (signed after marriage) can also offer protection around holding on to your early inheritance. These are legal agreements allow you and your spouse to designate how specific assets, including any inheritances, will be treated in the event of your divorce. A well-drafted agreement can stipulate that the inheritance remains your own separate property, and will not be divided between you and your spouse in a divorce.
Note that for such a prenuptial or postnuptial agreement to be valid, both you and your spouse must fully disclose your financial circumstances, and much each receive independent legal advice.
Related: Prenuptial Agreements in Ontario
Know Your Options
If your parents or older extended family members are thinking about giving you an inheritance early, it is essential to consult with an experienced Family lawyer to set up some legal protection for those funds right away. Contact us at Fine & Associates to discuss your situation, and understand your options.