Spousal Inheritance Entitlements
Equalization is the process of dividing assets to help address the financial disparity between two spouses after the breakdown of their marriage. This process consists of calculating each spouse’s Net Family Property value (“NFP”), which is all assets owned on the date of separation, including assets owed solely by one spouse, minus any liabilities as of the date of separation. Equalization is premised on the understanding that all assets built during the marriage were built together and therefore they should be equally divided. But what happens when an asset is acquired by one spouse as a gift or inheritance?
As set out in section 4 (2) of the Family Law Act, R.S.O. 1990, c.F. (“FLA”), there are some assets that may be excluded from a spouse’s NFP. If the purpose of equalization is to divide the assets built together during the marriage, then gift or inheritance do not form part of this notion. Gifts and inheritances are an exception to the rule of equalization. The value of gifts and inheritances that a spouse acquires during the marriage may be excluded from their NFP and not equalized. However, there are conditions to this exception.
In order for an asset to qualify as an exclusion, not only does it need to exist on the date of separation, but it must also be: 1) an asset other than the matrimonial home; 2) acquired by gift or inheritance; 3) from a third party; and 4) received after the date of the marriage.
It is important to note that, section 4(3) of the FLA, superficially provides that the spouse seeking the exclusion bares the responsibility of proving that the asset should be excluded, which includes proving that it existed on the date of separation, the value of the asset, and that it was a gift or inheritance received during the marriage.
Notwithstanding the above, gifts or inheritances received before the marriage are treated much differently. A gift or inheritance owned on the date of marriage is deducted from a spouse’s NFP even if that asset does not exist on the date the marriage ended. Though the value of the asset increases from the date of marriage to the date of separation, the increase in value will be divided.
Another consideration to make is that if a gift that existed on the date of marriage generates income, such as a rental property, then the income is never excluded or deducted. But, income generated from a property gifted from a third party during the marriage, may be excluded from the spouse’s NFP, if the donor or testator expressly state that the income is to be excluded. By way of example, where a spouse acquires property during the marriage and the property is not the matrimonial home, then the entire value of the gift, including the capital appreciation will be excluded.
Lastly, parties ought to be mindful of the way gifted or inherited property is handled. For instance, if a spouse deposits the gifted asset into a joint account it loses its exclusionary character to the extent that the half interest is presumed to be gifted to the other spouse. Though the courts have been fairly inconsistent when determining whether an exclusion should be applied in this case.
The law around equalizing gifts and inheritances is complicated and fact specific. Many considerations must be made when equalizing an asset. Questions about how to protect your gifted or inherited asset or whether or not it should be equalized are best addressed by seeking legal advice from family law counsel.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.