The sun is shining, birds are chirping, flowers are in bloom –why not talk about death and divorce? Some segues come easier than others.
Meeting with clients regarding wills involves discussing the various ways people enter and exit our lives. Often, this means discussing what happens if a person we mentioned in the will dies first; but, the possibility of a divorce or separation as well.
What happens to an inheritance if a beneficiary becomes entitled before or during a divorce or separation? Under the Family Law Act (FLA) there is a right, upon a marriage break down, to an equalization of family property, that is, the property that each spouse acquired during the marriage. However, the FLA excludes inheritances (in most cases) in calculating that equalization. Income earned on inheritance may be excluded too – but only if the testator specifically states this in the will.
Example: an adult child has net property acquired during his marriage valued at $100,000 at the time of separation plus $20,000 received by way of inheritance from a parent’s estate. The value of property used to calculate equalization (or sharing) with his spouse is likely $100,000, not $120,000.
Still, a beneficiary can always muck it up.
An inheritance isn’t excluded if it relates to a matrimonial home, the value of which the FLA states is shared equally between spouses. If the adult child puts the $20,000 inheritance (or part of it) toward a down payment or improvement to a house that either is or later becomes a matrimonial home, the inheritance is now subject to equalization with the spouse of the beneficiary.
An inheritance has to be traceable. If the inheritance goes into a joint account or inter-mingles with other non-excluded property or is used to buy (in conjunction with non-excluded funds) stuff (e.g., cars, furniture, etc.) during the marriage, it will be difficult (maybe impossible) for that beneficiary to identify and claim an inheritance exclusion later on; same goes for any income earned on the inheritance.
Of course, the beneficiary could always simply spend the inheritance during the marriage on intangibles or consumables – vacations, dinning out, etc.
While there are some things a testator can do or, at least, know to assist a beneficiary, the onus really falls upon the beneficiary to protect his or her own interests such as keeping inheritance clearly separate from other property and considering a marriage contract.
So, perhaps the best gift to a beneficiary is good advice during your life time: go see a lawyer (maybe even that Kowalsky fella).
Adam Kowalsky is an associate at the law firm of Cobb & Jones LLP. For more articles, visit the library page at www.cobbjones.ca