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Estate Planning and Marriage Breakdown - Protecting the Inheritance

In estate planning, a parent typically wishes to provide for their children and each child's family. However, this desire to benefit the child's family often has a caveat: the child's spouse should not receive any part of the inheritance in the event of separation or divorce.

Initiating the estate planning process can be daunting, but it is important for a parent to have a conversation with their lawyer regarding intentions for their children's inheritance. In many cases, a parent may wish to provide a gift to their child, but does not consider what will happen to the inheritance if their child dies prematurely, either before or after the parent's death. At the planning stage, a parent can consider various options in the event their child predeceases them, including gift over provisions in a will to distribute the inheritance among the child's siblings, the child's issue, or sometimes to the child's spouse.

If a child dies after receiving all or part of a parent's estate, what happens to the inheritance will depend on how the funds are used by the child, and whether the gift is given outright to the child or by other means, such as a trust.

One point of concern is how children will handle their inheritance once their parent is deceased. Under Ontario law, a will can specify that the inheritance, together with the income and growth from it, will not form part of the child's net family property for equalization purposes. However, this protection may be lost depending on what the child does with the gift. For example, if a child decides to purchase a matrimonial home or transfers a portion of the inheritance to a joint bank account with their spouse it loses its exclusion and becomes shareable property. Please also see my previous blog post.

While a parent may go to great lengths to ensure they have the proper planning in place, it is important that they have a conversation with their children about protecting their inheritance. This may include keeping inheritances separate and avoiding co-mingling with joint assets of the child and spouse. As well, the child should keep detailed records on the use of the inherited assets to eliminate any doubt in divorce proceedings.

Similarly, thought should be given to next generation estate planning. Adult children should be encouraged to have their own estate planning in place, keeping in mind that a will is revoked upon marriage unless it expressly states that it was executed in contemplation of such marriage. As well, provisions in a will are not revoked on separation and have no effect in favour of a former spouse unless there is a final divorce order.

In addition, a parent concerned with protecting their children's inheritance, particularly where the child has received gifts before the marriage or will receive substantial inheritances after such marriage, may wish to encourage their children to enter into a prenuptial agreement with their spouse. The agreement may specifically provide that any gifts or inheritances received by the child together with the income, growth and any property substituted therefore is excluded from their net family property calculation upon separation.

For estate planning purposes, if a parent intends to have their assets remain in the family, it should be clear to whom such asset should pass upon their child's death in the event their child predeceases them. In the event the parent predeceases the child, a trust can be used to protect the inheritance. A testamentary trust in a will can place limits on how the child's inheritance can be used during the child's lifetime and who can inherit the remainder of the gift upon their child's death. Certain trusts may have a "power of appointment" that allows for the child to allocate such assets in their own estate planning documents, but there may be limitations placed on who the group of beneficiaries may be. These limitations can be as restrictive or as general as the parent wishes.

A parent normally wishes to provide for their children in their estate planning and often does not consider the possibility of marital breakdown. Contemplating the claims of spouses and ex-spouses to an inheritance is an essential, but sometimes overlooked consideration. Proper estate planning can include various tools to keep wealth in the family and ensure the protection of a child's inheritance.

-Emma P. Hamilton

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.

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