Protecting Your Inheritance in the Event of a Separation or Divorce

When a family member decides to leave a gift by their Will, often the intention is to give the gift only to the beneficiary, not to his or her spouse. How can that beneficiary protect the inheritance from going to their spouse in the event of a separation or divorce?

As per Alberta’s Family Property Act[1], there are certain categories of property that are exempt[2] from distribution between married or unmarried spouses in the event of separation or divorce. Funds received by a spouse or adult interdependent partner (“AIP”)[3] by inheritance represent one such category. This means that in certain instances property or funds received by way of inheritance will not be included in the family property to be divided between spouses or AIPs upon a breakdown of the relationship.

However, growth in the market value of the exempt funds or property (e.g., income earned on an exempt investment or an increase in value of the exempt real estate) is a family property if the growth occurred after the AIP relationship began, or if no AIP relationship, after the marriage began. The growth or part of the growth considered to be family property would potentially be subject to division between spouses/AIPs.

In order to claim certain property as exempt in the event of a separation or divorce, it must either exist in its original form or be traceable into other property.[4] If the property was dissipated without being converted into some other asset owned at separation, it is no longer traceable or exempt. For instance, inherited funds used as the down payment to purchase a new home would be traceable, whereas inherited funds used for travel or household expenses would not be traceable.

Further, the inherited funds must remain separate and apart from the family finances and must not be put into joint names or a jointly owned asset. If the spouse is given some form of ownership over the funds, the court will presume that half of the funds were a gift by the spouse to the marriage. [5] As such, half of the exemption will be automatically lost and divided between the parties. For example, if Susie receives a $50,000.00 inheritance and used the same to pay down the mortgage on the family home that she jointly owns with her spouse, the law presumes that $25,000.00 of the exempt funds were gifted to the marriage and $25,000.00 remains exempt. In the end, if the non-exempt funds are split equally between Susie and her spouse, Susie may end up with only $37,500.00 of the original $50,000.00 exemption.

There are certain steps that you can take to ensure a measure of protection for any inheritance you may receive:

If the Inheritance Is Received Prior to the Marriage or the Date the Relationship of Interdependence Began

• Make sure to keep a copy of all records evidencing the bequest and the exact amount received from the estate.
• Retain documents that show the value of the inheritance as of the date of the marriage, or if parties are cohabiting, periodically throughout the early years of the relationship. For example, if the inheritance was deposited into a savings account, print off a copy of the bank statement. If the inheritance was used to purchase an asset, keep proof of the same and of the asset’s value at the applicable date (e.g., obtaining an appraisal of an inherited home). Because this type of information can be very difficult to locate later on, if obtained at the time of the marriage or start of the interdependent relationship, it can save the parties both time and resources later on.
• Do not intermingle the inherited funds with jointly owned assets or “family” assets (e.g., a “family” asset may be a home used as the family home but the title is in one spouse’s name alone).

If the Inheritance Is Received During the Marriage or Relationship of Interdependence

• Make sure to keep a copy of all records evidencing the bequest and the exact amount received from the estate.
• Open a separate bank account or investment in your sole name and keep proof that the inheritance was deposited into that account. If the inheritance is used to purchase real property or other assets, keep title in your sole name and do not use the property for any family purpose.
• Do not use the inheritance to purchase joint property, to pay off joint debts, or put it into a jointly owned asset. For instance, do not use the inherited funds to pay down the mortgage on the family home, as the down payment to purchase a new family home, or to renovate the family home.

The above recommendations, while ensuring as much as possible that the market value of the inheritance at the time it is received is preserved, are quite restrictive. Should spouses or AIPs wish to invest their inheritance in a joint asset or use it for a family purpose, parties can choose to do so and benefit their spouse by such a gift. Otherwise, they can enter into a Pre-nuptial or Cohabitation or Post-nuptial Agreement. These types of Agreements provide contractual evidence of the parties’ intentions at the time of entering into the relationship or marriage and can help to ensure that the full exemption is maintained in the event of separation or divorce.

Please do not hesitate to contact us at 780-482-7691 or info@quantzlaw.com should you wish to speak with any of our family law lawyers for further information in regards to claiming an exemption or drafting a Pre-nuptial or Cohabitation Agreement.

Dayna E. Kwasney

NOTICE TO READER: The summaries of legal rights and remedies described above are general references to the Alberta laws existing at the date of the publication and may not apply to the reader’s individual circumstances. Also, the laws may change. These legal summaries are not to be relied upon as applicable to your individual circumstances and are subject to a complete review of the facts and applicable laws in every case

1. Family Property Act (“FPA”), RSA 2000, c F-4.7.
2. FPA, s. 7.
3. [Please see the Family Law section of our website for further information regarding what constitutes an Adult Interdependent Partner relationship.
4. Harrower v Harrower (1989), 97 AR 141 (CA).
5. Jackson v Jackson (1989), 97 AR 153 (CA)