How a Separation Agreement Impacts Future Inheritance

Defining Inheritance and Excluded Property in Ontario

Inheritance as Excluded Property

Under Ontario’s Family Law Act, inheritances are generally classified as excluded property, meaning they are not subject to division during separation or divorce. This designation provides that any inheritance received by one spouse, whether before or during the marriage, remains theirs exclusively. This exclusion aims to respect family gifts or inheritances as personal property that shouldn’t automatically become part of a joint estate upon separation.

However, there are specific conditions to maintain this “excluded” status. For inheritance to remain separate, the receiving spouse must keep it distinct from joint marital funds. For instance, if a spouse inherits money and deposits it into a personal account without mingling it with joint assets, it is likely to be treated as excluded property. This distinction is essential for spouses who wish to protect their inheritance from division in the event of a separation or divorce.

Exceptions to Exclusion

While inheritance is often protected as separate property, certain actions can transform it into shared property, subject to division under family law. The following scenarios outline how inheritance can lose its excluded status and become divisible:

• Joint Investments: If inheritance funds are invested in assets jointly owned by both spouses, such as purchasing a shared home, cottage, or investment property, the inheritance is no longer considered excluded. For example, if a spouse inherits money and uses it as a down payment on a marital home, the entire property, including the inheritance, may become divisible.
• Joint Accounts: Placing inherited funds into a joint bank account with the other spouse can also compromise the inheritance’s status as excluded property. In this situation, the funds are considered “co-mingled” with marital assets, making it challenging to argue that the inheritance remains separate. Courts may view such an action as an intention to treat the inheritance as shared property.
• Direct Contributions to Marital Expenses: If inheritance is used for family expenses, debt repayment, or home renovations, these contributions may be treated as a form of joint investment in the marriage. Courts could see this as indicating an intention to share these resources, especially if it’s difficult to trace the inheritance to a specific, separate asset.

How Future Inheritance May Be Addressed in a Separation Agreement

Protecting Future Inheritance

One of the most effective ways to ensure that future inheritances remain protected is to specify them as “separate property” in the separation agreement. By including clear terms that outline any future inheritance received by either spouse as individually owned, couples can avoid the potential for inheritance to become subject to division. This approach is particularly beneficial when both parties have an understanding that inheritance funds should remain exclusive to the inheriting spouse.

Options for safeguarding future inheritance in a separation agreement can include:

• Clear Designation of Separate Ownership: Specifying that all inheritances, regardless of the amount or nature, are to remain the individual property of the receiving spouse.
• Restriction on Use of Inheritance for Joint Expenses: Outlining that any future inheritance should not be used for marital expenses, joint purchases, or investments, which helps prevent the funds from inadvertently becoming joint property.
• Tracing Requirements: Stipulating that any inherited funds must be kept in separate accounts or used in ways that make it easy to track their use. This makes it easier to demonstrate that the inheritance has not been co-mingled with marital assets.

Including such clauses in a separation agreement helps both spouses plan for future inheritances and creates a legal safeguard for keeping these funds separate.

Inheritance of Jointly Owned Assets

In cases where inheritance is used to purchase or invest in jointly owned assets, such as a family home, the separation agreement should address how these assets will be handled. This is especially important if inheritance funds are co-mingled with marital assets, as this can blur the line between separate and shared property.

If both spouses agree that inheritance funds may be used toward joint assets, the separation agreement can outline terms to address how these assets will be treated in case of separation or divorce. Some possible approaches include:

• Proportional Ownership Clauses: Specifying that any increase in the value of jointly owned assets attributable to one spouse’s inheritance will be allocated back to that spouse.
• Buyout Provisions: Including terms that allow the inheriting spouse to “buy out” the other spouse’s share if the asset was purchased or improved using inheritance funds.
• Restrictions on Sale: Establishing conditions for the sale of jointly owned assets purchased with inheritance, ensuring that the inheriting spouse’s contribution is recognized.

By addressing these scenarios in a separation agreement, couples can clarify expectations and reduce the risk of disputes arising over jointly owned assets that were funded, at least in part, by inheritance.

Specifying Terms for Family Heirlooms or Gifts

When it comes to family heirlooms or sentimental gifts, a separation agreement can provide critical guidance. These items often carry emotional value and may be intended to remain within the inheriting spouse’s family. However, without clear language in the separation agreement, family heirlooms or gifts can become a point of contention.

To prevent this, spouses can include clauses that explicitly define ownership of specific family items, ensuring that they remain with the intended party. This approach can include:

• Designation of Heirlooms as Separate Property: Specifically listing valuable or sentimental items in the separation agreement and designating them as the separate property of one spouse.
• Clear Terms for Gifts: Defining which items are gifts to one spouse from their family and are therefore excluded from marital property.
• Conditions for Transfer: Including conditions that prevent the sale, transfer, or division of family heirlooms or gifts, unless agreed upon by both parties.

By taking these steps, a separation agreement can preserve the integrity of family heirlooms and help ensure that both parties respect the sentimental value of these items.

Revisiting the Separation Agreement for Future Inheritances

Updating the Agreement

A separation agreement can be a flexible document, allowing spouses to update terms if they anticipate significant financial changes, such as an inheritance. By revising the agreement to include or clarify terms for future inheritances, couples can avoid potential disputes and ensure that intentions regarding these assets are upheld.

Some situations where updating the agreement might be beneficial include:

• Significant Anticipated Inheritance: If one spouse expects to inherit a considerable amount from family or close relatives, it may be wise to add specific clauses outlining how the inheritance should be treated to prevent co-mingling with marital assets.
• Increased Asset Value: If a previously specified inheritance has grown substantially in value (e.g., real estate or investments), spouses may wish to update the agreement to reflect its current worth and protect its status as excluded property.
• Changes in Marital Finances: If there has been a significant change in one or both spouses’ financial situations, updating the separation agreement to better define the inheritance’s role within the financial picture may prevent future misunderstandings.

To update the separation agreement, both spouses need to agree to the revisions, ensuring that the new terms accurately represent their intentions regarding inheritance. By keeping the agreement up to date, spouses can ensure that their inheritance rights are secure.

Seeking Legal Advice

Given the complexities of Ontario’s Family Law Act and the specific provisions related to inheritance, consulting a lawyer is critical when drafting or revising a separation agreement to include future inheritances. Legal advice ensures that the agreement complies with Ontario law and that all terms are enforceable.

A lawyer can assist in several important ways:

• Clarifying Legal Protections for Inheritance: A lawyer can explain how the law treats inheritance as excluded property and help clients structure the agreement to reinforce these protections.
• Drafting Precise Language: Using clear, legally sound language is key to preventing disputes over inheritance in the future. A lawyer can draft specific clauses that outline how future inheritance should be managed and preserved as separate property.
• Preventing Co-mingling of Assets: Lawyers can advise on how to handle inheritance funds to avoid inadvertently converting them into joint marital property. This can include strategies like setting up separate accounts or investing in assets that will remain the inheriting spouse’s sole property.
• Ensuring Fairness and Transparency: A lawyer can help ensure that both parties fully understand and agree to the terms related to inheritance, reducing the likelihood of future conflicts or challenges to the agreement.

In Ontario, enlisting a lawyer when revisiting a separation agreement for future inheritances is a sound strategy for protecting assets and aligning the agreement with current laws. With a clear, legally enforceable document in place, both spouses can proceed with confidence that their inheritance will be safeguarded.