The Treatment of Gifts and Inheritances in Family Law
As many people know, when couples divorce, they usually need to share any increase in the value of their property that was accumulated during the marriage. But what if you received a large gift or inheritance from your parents during the marriage? Do you have to share that wealth with your partner when you split up? It depends. This article will provide a general summary of the treatment of gifts in family law. The information in this article is NOT legal advice. Please consult with a divorce lawyer for your particular situation.
What if I received a gift or inheritance before the marriage but I still own it when I separate from my spouse?
Gifts received before marriage are not excluded property. They are treated like other assets that you bring into the marriage. Their value at the date of marriage is deducted from their value at the date of separation. So, you don’t have to share the entire value with your spouse, but you do have to share any increase in its value. The only exception is if the person who gave you the gift explicitly stated that the gift and any increases in the value of the gift are to be excluded.
But what if you are bringing in a home you received through a gift or inheritance? Unfortunately, you do not get to automatically deduct the value of the home on the date of marriage. This means that you may end up sharing the entire value of the matrimonial home with your spouse upon separation. There are exceptions to this rule as discussed below.
How can I protect my gift or inheritance?
In order to avoid sharing the value of gifts or inheritances, parties can enter into a marriage contract (also known as a prenuptial agreement) whereby both parties agree that upon separation the property will be treated as an excluded asset. This can be particularly useful for real estate owned prior to a marriage that becomes the matrimonial home. If you bring in a home that was worth $500,000 on the date of marriage and by the time you separate it was worth $1,000,000, your spouse can theoretically be entitled to $500,000 as of the date of separation. You will not get any credit for bringing the home into the marriage, even if your spouse did not contribute to its acquisition costs. It is important to note that a marriage contract can also be entered into after the date of marriage.
Another way to claim an exclusion, partially or fully, of a gift or inheritance from property division in a divorce is to argue for an unequal division in court. This is a much more complicated procedure and requires litigation.
What happens when I receive a gift or inheritance during the marriage?
As long as the gift or inheritance is kept separate from family property, it will be excluded, including any increase in the gift’s value.
Note that the gift or inheritance has to still exist at the date of separation in order for it to be excluded. If you spent it or otherwise gave it away, it is not excluded.
If you received an inheritance in the form of cash that you then deposited into a joint account with your spouse, and the funds from that joint account were used to pay the mortgage or other family expenses, then that inheritance is no longer excluded from the equalization payment. The key is to avoid spending the gift or inheritance on family purchases if you wish to protect its value from being equalized.
If you receive a gift or inheritance, keep it in a separate account in your name alone to avoid confusion. Any increase in the gift’s value will also be excluded as long as it is kept separate.
What if my spouse gave me a gift during the marriage?
In order to be excluded, the gift needs to come from a third party. Gifts between spouses are included in your financial statement based on whoever has title to the property and is subject to equalization. In other words, if you spouse gave you a gift such as $10,000 worth of jewelry during the marriage, it is not excluded property.
For more information about obtaining a divorce or about obtaining family law services in Ontario, please contact our Toronto divorce lawyer here.
How Treatment of Gifts and Inheritances Can Lead to Unfairness
The rules surrounding the inclusion and exclusion of gifts and inheritances from a third party can lead to unfairness.
According to the Family Law Act, the appreciated value of premarital gifts and inheritances from a third party are not automatically excluded from calculation of a spouse’s net family property. On the other hand, as it was mentioned, gifts and inheritances from a third party received during the marriage are excluded. Either all increases to a spouse’s net worth during the marriage from gifts and inheritances from a third party should be included in the equalization calculation, or all increases should be excluded, regardless of whether received before or during the marriage.
The main concern relates to the timing aspect of when the gift and inheritance from a third party is received by a spouse. If a spouse receives the gift or inheritance prior to the marriage they must include the appreciation that occurs from the date of marriage to separation. Whereas, if the spouse receive the gift or inheritance after marriage, even one day after marriage, then the entire value is excluded from the net family property calculation.
An example to illustrate the potential unfairness that the rule can result in. If a client inherits real property from a deceased relative, before getting married, several decades later that property may have appreciated by several hundred thousand dollars. If the deceased relative had passed away one day after the marriage the entire property, including the appreciation, would have been excluded from the equalization calculation.
A party can, theoretically, try to argue the variation of share, or unequal division, provisions in the Family Law Act. However, many clients are hesitant to spend the time and money, and to go through the stress and uncertainty litigating this aspect of the law. It is, in fact, extremely unpredictable.
A better way to deal with this issue would be for parties to enter into a marriage contract. The marriage contract can address how equalization will proceed upon separation and how gifts and inheritances will be treated. However, the reality is that most couples do not really entertain such an option. In fact, most couples are likely not even aware of this rule and the benefit of entering into a marriage contract..
At Simple Divorce, we believe this issue may become more prevalent in the next 10 years as more and more baby boomers start to pass away, leaving sizeable inheritances to their relatives who may eventually themselves separate or divorce down the road.
NOTICE AND DISCLAIMER: The material posted on this website is for informational purposes only and should not be relied upon as legal advice. If you need legal advice, please consult with a family lawyer
Other Articles to Read
Divorce and Separation
Family Justice Services
Child Custody and Access
Division or Equalization of Family Property
Treatment of a Matrimonial Home
Enforcement of Support Payments