While separations are nothing new, Jack Song says litigation around large gifts and inheritances upon separation have become much more common over the past several years.
That’s partially due to the affordability crisis, says the lawyer in Perley-Robertson, Hill and McDougall LLP’s Family Law Group. “It’s tougher and tougher for younger generations to afford a home,” he explains.
“We’re seeing younger people receiving gifts and help from their parents or other relatives to fund large expenses, like the honeymoon or matrimonial home.”
But Song says the legal nuances around gifts and inheritances upon separation can be much more complex than some people think – especially around the matrimonial home – which can lead to a nasty surprise if you haven’t done your homework.
‘There are ways to lose your protection’
“Net family property” is a legal term describing the difference between a spouse’s net worth on the date of separation and date of marriage. This property must be divided equally (“equalization”), subject to certain exceptions; one common exception is around gifts and inheritances received by a spouse during the marriage.
- Section 4(2) of Ontario’s Family Law Act provides that property acquired by gift or inheritance from a third person after the date of marriage is exempt from equalization, along with income from that property as long as “the donor or testator has expressly stated that it is to be excluded from the spouse’s net family property.”
- The value of the gift or inheritance at the time of separation, not at the time of receipt, is the amount excluded.
This leads many facing separation to believe that any gift or inheritance is exempt from equalization. But that’s not the case if the gift was used to finance a matrimonial home, or used to purchase a joint asset (in the latter case, the spouse can lose half the exclusion).
Song says misunderstandings around what’s exempt and what’s not can have profound consequences.
“It can sometimes be a trap for people,” he explains, “because they may think they’re safe from sharing with their spouse, but they fail to understand that there are ways for them to lose that protection. This is especially common around the matrimonial home.”
Best practices around inheritances, gifts, and equalization of net family property
Even if people know the law intimately, Song says determining a spouse’s net family property after years of marriage can still be a huge challenge.
“It’s actually impossible if you didn’t have any records,” he says. “Banks only keep records for up to seven years, and for non-cash assets it’s even more difficult when it comes to finding evidence that it even existed.”
That’s one reason why Song advises the following best practices to ensure spouses protect themselves in the event of a separation.
- Consider a marriage contract or cohabitation agreement: Marriage contracts or cohabitation agreements colloquially known as “prenuptial agreements” can be drawn up at any time before or during a marriage. It’s something he recommends, especially if you’ve got large gifts or inheritances on the way. “It forces you to have an inventory of your assets. You’re putting in an agreement that your spouse acknowledges you have in fact brought those assets into the relationship.”
- Acquire a gift letter or will: Whomever provides the gift or inheritance can make your life easier – especially if you want to derive income from your gift or inheritance – by providing a gift letter or will explaining that the donor wants the gift or inheritance excluded from equalization. For wills, Song says most Ontario lawyers typically include a Family Law Act clause that covers inheritance exclusions, but if you’re concerned, it’s important to check and make sure.
- Keep your receipts (and a separate bank account): Traceability is always a lot easier with proper documentation such as receipts, gift letters, or wills. But what’s even more important, Song says, is keeping a dedicated bank account to deposit funds from gifts and inheritances. “Can we legally establish that the money you have on the date of separation is part of the money that you received as a gift or inheritance?” And that can be next to impossible if you mix those funds with your day-to-day operating accounts.
- Be aware of the rules around joint accounts: Putting your gift or inheritance into a matrimonial home means you lose the entirety of the exclusion, but that’s not the case with joint accounts. “You’re still able to exclude your half of the joint account,” Song explains.
If you expect to receive a large gift or inheritance, consult one of Perley-Robertson, Hill and McDougall LLP’s family lawyers about how it may be impacted by a separation – and the best way to manage the situation.
