How can parents ensure that a gift to an adult child, or a bequest in their will to a child, will not be shared with a child’s spouse if the child’s marriage breaks down?
There are several actions a parent can make to protect a gift or inheritance to a child. Before explaining the techniques that can be used, it is necessary to get an understanding of basic legal principles in this area of law as set out in the Family Law Act. First, a spouse is entitled to exclude from sharing any asset, except a matrimonial home, that was inherited or received by way of a gift, since the marriage. That gift must still be in existence or traceable at the time of the marriage breakdown. Second, a spouse does not have to share the income from such a gift or inheritance if the donor of the gift specifically stated that the income did not have to be shared. Third, one gets credit at the time of the breakdown for one’s net worth at the time of marriage.
The first procedure to protect the child is therefore legal advice. A child should be advised not to spend the gift or inheritance on expenses or on the matrimonial home. The money should be used for the child’s savings such as a RRSP or other investments. Good records should be kept to trace the proceeds of the gift or inheritance to such investments. If the child wants to use the money to pay down a mortgage (which is almost always the best financial advice) then before doing so a simple single issue marriage contract can be made. The contract would guarantee that if the marriage broke down the spouse who paid down the mortgage would, contrary to the Family Law Act, get credit for the payment. A marriage contract can change the Family Law Act in this respect.
Another technique is to have a parent’s will specifically state that the income from an inheritance shall not be shared. All wills signed after March of 1986 should have such a clause. When giving an income-producing gift, such as a large amount of money, the parent should make a similar statement in writing.
If the parents, during their lifetime, give money to a child and the child’s spouse, perhaps to buy a house, then a promissory note should be signed. This will make it clear that this was not a gift but a legitimate loan. On marriage breakdown the loan would have to be paid back. The parents can then, if they wish, give the whole amount to just their child.
There are two actions that may seem a little offensive and petty but would nevertheless protect one’s child. First, when making a gift the parent would make it clear that it is just for their child and not for the spouse. Otherwise the spouse can claim they received a 50% interest in the gift. Second, when giving a marriage present the rule is to give an asset that depreciates with time (such as furniture) or money that will be spent on expenses before the marriage takes place. It is advisable to give an appreciating asset (such as a stock or silver) after the marriage takes place. The reason is that the child gets credit for their total net worth at the time of marriage and one does not have to share an asset that was inherited or given to them during the marriage.
More sophisticated and expensive techniques such as trusts and conditional bequests also could be used. Some techniques may be offensive. However, the reality is that many marriages fail. Most of the actions set out above do not cost anything and will eventually help the child when he or she might really need it.
* This article can only provide a general overview of a legal topic. Readers should consult a lawyer and not simply act on the information provided in this article.