Mark Epstein, a family lawyer in Newmarket, answers:
In general, money inherited during the marriage by one spouse does not need to be shared with the other.
Ontario’s Family Law Act (FLA) sets out a formula for the division of property when a marriage breaks down. Typically, when a married couple separates, the growth in the net worth of each spouse is calculated from the date of the marriage to the date of separation. The increase in each spouse’s net worth is known as that spouse’s net family property. The difference between the spouses’ net family properties is then equalized between them. At that point, one spouse may have to make an equalization payment to the other – a payment of half the difference of the parties’ respective net family property amounts.
Generally, an inheritance does not count toward a party’s net family property as it is excluded property under the FLA. However, there are important exceptions. If inherited money can be traced into the matrimonial home – that is, the property ordinarily occupied by the spouses as their family residence at the time of separation – then that inheritance will not be excluded from net family property. Also, if the inheritance was deposited into the spouses’ joint accounts, case law has dealt with such monies by attributing 50% to each spouse – subject to argument if the funds are traceable. Therefore, inherited monies should be kept separate and distinguishable from any joint accounts or matrimonial property to exclude them from the equalization formula.
Another important distinction is the timing of the gift or inheritance. If the money is received during the marriage, it will be eligible for exclusion from the equalization formula; an inheritance received before the marriage will be included in the beneficiary spouse’s calculation of net family property. In the latter case, the spouse can claim a deduction for the value of the inheritance as of the date of marriage – provided of course, that the gifted or inherited asset was not invested in the matrimonial home or a joint account.
For example, a spouse receives $200,000 as a gift before the marriage and immediately invests that gift in securities. If the investment has increased in value to $400,000 by the date of separation, then the value of the $200,000 increase must be equalized between the spouses. By contrast, suppose the spouse receives $200,000 as a gift during the marriage and again immediately invests that gift in securities. If the investment has increased in value to $400,000 by the date of separation, the spouse can exclude the value of the entire investment from equalization and s/he need not share any of it.
Lastly, inheritance and gifts are not the only types of property to be excluded if received during the course of the marriage. Exclusions also apply to proceeds of insurance claims and to monies received in satisfaction of personal injury claims.
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