What Happens to Inherited Money in a Divorce?

If you’re lucky to have inherited money lately, but unlucky in your relationship, you might be wondering what your rights are.  It’s one of the most common questions we get from people who are in the midst of a separation or divorce: What happens to inherited money in divorce that’s been inherited during the marriage?

The answer under Ontario Family Law often surprises people: Inherited money – whether by you, or your (now) Ex – is not always protected, and how it is treated depends on what you did with it during the marriage.

The key lies in the legal difference between the concepts of “family property” and “excluded property” as defined by the provincial Family Law Act. It’s important to understand the distinction.

Inheritances are Excluded – Sometimes

The basic rule is simple: Inheritances that you or your Ex received during your marriage are usually excluded by law from the assets you and your Ex have to share — but only at first.

Under Ontario law, once you separate most of the property that either of you acquired during the relationship has to be shared. This takes place during a legislatively-defined process called “equalization” of what’s known as your respecting Net Family Property (NFP).

However, certain assets can be carved out of your NFP as “excluded property.” Inheritances, as well as gifts received from third parties during your marriage, generally fall into this category.

But Wait! You Need to Trace

In practical terms, this means that if you received an inheritance while married, its value is normally excluded from the equalization calculation, provided:

• You can clearly trace it, and
• You have kept the funds separate.

This tracing requirement is critical for keeping your inherited funds in your own pocket. You must be able to show:

• When the inheritance was received
• How much was received
• Where it went (e.g. how it was dealt with, whether it was invested or spent, and on what)
• That the inherited amount remains identifiable.

The clearer the evidence, the better your odds. For example if your inherited funds were placed into a separate account and left untouched, then arguing for an exclusion from your NFP is usually straightforward. But problems quickly arise if your inheritance was mixed with family finances.

Avoid Commingling

That brings us to a second issue: Commingling.  Even though inherited money starts off in the “excluded” category, it can lose that status if it has been commingled with your marital assets. This is the most common way that inheritances get unwittingly absorbed into the equalization calculation.

Examples include:

• Depositing your inheritance into a joint account used for household expenses
• Using inherited funds to pay down the mortgage on your matrimonial home
• Putting the inherited money into investments that you hold jointly with your Ex
• Using the inheritance money for renovations or major improvements to your matrimonial home.

Once an inheritance is blended with shared assets, it can become impossible to trace. When that happens, courts typically treat the money as family property, meaning its value is included in the equalization calculation under either your NFP or your Ex’s, depending on which of you received the funds.

The Matrimonial Home is Different

Last but not least, there’s a key exception to know:  Even if inherited funds are carefully kept separate, special rules apply if you and your Ex have used them to buy the matrimonial home you lived in during your relationship.

This is because under Ontario’s Family Law Act, the matrimonial home receives unique treatment. If any of the inherited funds are used to purchase, improve, or pay down debt on the matrimonial home, that part of the money generally loses its excluded status. In other words, even those inherited funds that are traceable can become shared through the equalization process, the moment they are invested in the family residence.

This can feel very counterintuitive. You may have received an inheritance from your parent or grandparent, only to discover years later that those funds are now part of the marital asset pool because they were applied to the home you shared with your Ex.

What About Post-Separation Inheritances?

The good news is that any inheritance you received after you separated from your Ex are not part of the equalization process.  In that case, it’s yours to keep.

However, those funds can still factor into any ongoing spousal support that you may have to pay to – or else be entitled to receive from – your Ex. A significant post-split inheritance received by either of you can change your financial circumstances, and may be relevant when the court determines support entitlement, or the amount.

Pro Tips on Inherited Money in Divorce

If you received (or expect to receive) an inheritance during your marriage but are now thinking about separation or divorce, here are some ways to ensure you can keep the funds in your own hands:

• Good record-keeping is essential. The goal is a paper-trail to show that your inheritance is separate from your other marital funds. Bank statements, estate documents, and transaction histories can make the difference between excluded property and shareable assets. If you don’t have this documentation, even funds that were clearly inherited during your relationship may be treated as family property, simply because they cannot be reliably traced.
• Consider a marriage contract. If you’re still living together but the relationship is on the rocks, consider a marriage agreement or separation agreement to specifically address how any inheritances you’ve already received will be treated if you do separate. (And by the way, these agreements can cover more than just your inheritance; they can be negotiated to mutually benefit both you and your Ex on your legal rights and the treatment of your respective assets).

In all scenarios, early legal advice is important.  Here at our Firm, we can provide guidance on how to keep your inheritance separate, and can help you draft an ironclad contract to ensure there are no gray areas.  Feel free to give our offices a Call or request a Free Consultation.