Inheritance and Matrimonial Property
For some households, an inheritance can make a significant difference in their financial lives. Finally, a home can be purchased, or a mortgage or other debts paid off, or woefully inadequate RRSPs and other accounts for retirement can be fully funded.
Married couples manage their finances in different ways. Some keep things very separate; other couples operate under the adage that what’s mine is yours and what’s yours is mine. The law has its view on such things, including inheritance. The legal term is “matrimonial property.” Unfortunately, this term generally finds its application only when the dissolution of a marriage is involved. Divorce laws in Canada seek to arrange for a fair distribution of matrimonial property between the two spouses, with a 50/50 division being the starting point.
Not all assets are necessarily included in matrimonial property, however.
What is excluded from Matrimonial Property?
Matrimonial property differs depending on your province. However, generally excluded are things like insurance proceeds, injury awards, and inheritances. Business assets may also be excluded if those assets were exclusively of one spouse’s creation. Property brought into the marriage by one or the other spouse is another category of asset that is typically excluded.
What is included in Matrimonial Property?
In general, matrimonial property refers to assets that the couple accumulated while they were married. A commonly included asset is the family home.
Another item would be a pension. If one spouse had a pension while the other did not, it would likely be split down the middle in proportion to the number of years that the couple shared as spouses. Let’s assume that Spouse A’s pension had accumulated over 20 years and was worth $200,000. However, Spouse A had only been married to Spouse B for 16 years. The pension would then be split according to 80% (16/20) of the value of the pension or $160,000. Based on a 50/50 split and excluding other assets from consideration, Spouse B would be entitled to receive $80,000 of the $200,000.
Canada Pension Plan benefits may also be divided in a fashion like a private pension plan, as above. Depending on the jurisdiction, however, the two divorcing spouses could divide their respective CPP benefits so that they receive the same CPP payments in the future.
How an excluded asset can become included
An asset that is normally excluded, such as a gift or inheritance, can become included if it is treated as though it were matrimonial property.
Not keeping the inheritance in a separate account
If an inheritance comes to you in the form of cash, the best way to keep this normally excluded asset from becoming included is to keep it in a separate account. If it gets mixed in with the rest of your funds and a portion of it gets spent for household needs, then you may be unable to trace back the money to its origin as an inheritance.
If you place that money in a joint account and use it to purchase property (not necessarily your principal residence) that is owned jointly, then the presumption is that you intended to make a gift of half of that money to your spouse. Then the only portion that can be excluded is the half that is still yours.
Using the inheritance money for the matrimonial home
The matrimonial home is treated differently from other properties. Excluding the presence of a valid marriage contract (aka prenuptial agreement), its value will always be split between the spouses. Ways in which inherited money can lose its exclusion through the matrimonial home include: using it as a down payment; paying down the mortgage or home equity line of credit; or, spending a portion on renovations to the home.
What about income or growth from an inheritance?
This depends on the province or territory. In Manitoba, income or growth from an inherited asset is excluded, unless the income or growth came because of a family asset that was purchased at least in part by using inherited funds. The Northwest Territories also excludes income or growth that can be traced back to an inheritance.
Ontario is a bit different. Income is only excluded if the donor specifically stated that the income from the inheritance is part of the inheritance and is to be excluded from the family property.
There are additional considerations to keep in mind, and your province or territory will have its own rules that you will need to deal with, but perhaps this is sufficient for recognizing the legal ramifications of someone who wishes to provide an inheritance or who anticipates receiving an inheritance.
This is the 126th blog post for Russ Writes.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.