Inheritances excluded from net family property

Many individuals expect to inherit money from their parents at some point. If you’re married, it’s worth thinking about how you plan to use this inheritance, since how you use the money, or where you invest it, will have implications for the division of property if your marriage ever breaks down.

When people separate, the difference in their respective net family properties is equalized. However, under section 4 of the Family Law Act, gifts or inheritances received from third parties during the marriage are excluded from this calculation unless they have been invested into the matrimonial home.

Most Wills specifiy that any gifts to a beneficiary do not form part of any community of property, in order to protect inheritances from being equalized with a spouse.

Many people want to invest inheritance monies in upgrading or improving the matrimonial home. Since excluded property will automatically lose that status once it’s invested in the home, it might be a better idea to use a joint line of credit to fund renovations, and place inheritance money into a separate investment.

It’s best to segregate inherited funds as soon as they are received. Don’t deposit the funds into a joint bank account or comingle them with other family funds. Although failing to keep funds separate won’t necessarily mean that the funds will lose their status as excluded property, at the very least it will make it more difficult to properly trace the funds, especially if you’re having to provide an accounting over a period of many years.

If your actions suggest that it was your intention to treat the inheritance as shared property with your spouse, or as a gift to your spouse, it may lose its status as excluded property. If you buy a joint investment with your spouse, for example, recent caselaw suggests that it might only be possible for you to claim an exclusion for one-half of the value of the asset. You cannot claim the full value because one-half of the investment will be construed as a gift to your spouse.