What happens to one party’s inheritance when a couple separates? The answer depends on how the inheritance entered the relationship, and how it was spent, if at all. If one spouse receives an inheritance during the marriage and retains it, it will most often be excluded from the division of property upon separation.
In the case of O’Connor v. O’Conner, the Ontario Superior Court of Justice provides us with further insight into how the courts might approach such situations. This decision highlights the importance of not only having an estate plan, but also, things to consider when a party to a relationship receives a large sum of money.
The parties were married in 1986 and separated in 2015. The parties had two children together, both of whom were adults and were living with the mother in the matrimonial home after the separation. The wife was 58 years old and unemployed at the time of the trial. Her only form of income was Canada Pension Plan disability benefits while she underwent cancer treatment. In 2021, the wife’s income tax return listed her annual income as $24,000.
The husband had worked a variety of jobs and had a red seal certificate. After being terminated by his employer, he opened a sheet metal business with two business partners.
Following the separation, the husband claimed that the wife owed him an equalization payment totaling $99,132, which includes a portion of the wife’s inheritance from her late aunt’s estate. The wife sought confirmation from the Court that her inheritance money would remain her property, exempt from division.
The husband relied on a 2013 case where the court held that funds which were received by one party as an inheritance, but were co-mingled with family funds, voided the inheritance from being excluded from a division of family property.
In the O’Connor case, the children also received smaller sums of money from the wife’s late aunt. The husband stated that the combined inheritances were placed into a joint account and were used for expenses beyond savings or for the benefit of the children. The husband went on to say that the wife’s funds were deposited into a $USD bank account that was held in joint names of the husband and wife.
The wife agreed that she owed the husband an equalization payment, but argued that he was only entitled to $48,969, which excluded the inheritance. The wife relied on the traditional rule that inheritance funds are generally excluded from family property asset division.
The wife responded to the father’s evidence that her share of the inheritance was placed into a joint account, and stated that this was only done with the intent of ensuring the right of survivorship to the funds in the event of her death. As for the intermingling of funds, the wife stated that her money was kept separate from the rest of the family funds with the single exception of using some of the money to help pay for a family trip to Disney World.
The Court confirmed that the starting point in determining this issue was section 4(2) of the Family Law Act, which states that:
“The value of the following property that a spouse owns on the valuation date does not form part of the spouse’s net family property:
Property, other than a matrimonial home, that was acquired by gift or inheritance from a third person after the date of the marriage.”
Despite the wife’s inheritance funds being placed in a joint account, the Court found that this was only for estate planning purposes, as outlined by the wife. The Court went on to detail that while the husband could have managed the funds, he never deposited money into the account, nor did he use funds from it. This wasn’t uncommon for the couple, though, as the Court determined that the wife controlled the family finances. Further, the Court determined that the Disney trip was the only expense to come from the account.
Based on the evidence, the Court agreed with the wife’s statement that the only reason the inheritance was placed into a joint account was for estate planning purposes to ensure that the husband would benefit from the right of survivorship if she were to pass away.
This finding was supported by both the Family Law Act and a 2007 Supreme Court of Canada decision from Pecore v. Pecore which states that when it comes to gratuitous transfers of money between spouses, where the transferee provides no consideration, the onus is on the transferee to demonstrate that the funds were intended to be a gift.
In this case, the husband received the funds when his name was added on the account, making him the transferee. Since he provided no consideration for the funds, he was required to prove that the money was intended to be a gift, which he failed to do. The Court confirmed that the Disney trip alone does not provide sufficient evidence, as this was a one off event. As a result, the inheritance funds were determined to be the exclusive property of the wife and were not subject to property division.
At Derfel Estate Law, our lawyers understand the complexities surrounding inheritances received through the estate administration process. It is important for anyone who receives an inheritance, regardless of how much, to understand how to manage those funds and make decisions which will protect their inheritance from potential issues down the road. Whether you have questions about a recent inheritance, or have questions regarding estate litigation generally, our team can help. To discuss your circumstances with a member of our estate team, please reach out to us online or call us at 416-847-3580.