What’s mine is mine

When it comes to the finances of committed couples, what works for both of you also needs to work for each of you.   And sometimes there is conflict between the two.

Tom and Sally had been married for 16 years when Sally received a significant inheritance from her parent’s estate.   With school-age children in AAA hockey and competitive dance, they were not only constantly on the run but while they had good incomes and made a habit of saving, they were stretched financially.  Tom viewed Sally’s inheritance as a means for them to pay off their mortgage and accelerate their retirement savings.   Sally had been thinking along similar lines, until a meeting with the lawyer handling her parent’s estate opened her eyes to a significant issue:  When it comes to receiving an inheritance, what’s mine can stay mine, or it can turn into what’s ours.   It all depends on what you do with it.

An inheritance is one of the few financial resources that, depending on your legal jurisdiction, can be excluded from the division of property when a couple separates or divorces.   Those inherited funds, gifts, or items need to be handled quite specifically in order to be excluded and it is essential to get proper legal advice to ensure you handle it properly.   Two important things to be aware of and get further insight from your lawyer about are:

  1. Keeping it separate: Keeping inherited funds in accounts or property solely owned in your own name may protect their value for you.  Don’t co-mingle those funds with other assets.   For instance, if you receive a bonus from work, don’t put that money in the same account as your inherited funds.   Keeping funds entirely identifiable as being from your inherited assets (and detailed records) is very important when it comes to keeping your inheritance as all yours.   It should be noted that while the capital may be entirely yours, in the event of a relationship breakdown, your partner may be entitled to some of the income generated by the inherited funds.   For instance, if you invest your inherited funds and earn investment income, or purchase a rental property and collect rent, it is possible that income may not be excluded.
  2. Beware using it towards the marital home: Using your inheritance to paying down that mortgage, or to buy your marital home, or moving into a house together that you inherited, in the absence of a valid domestic contract that stipulates otherwise, it’s value is shared.   You may effectively be giving your spouse a gift of 50% of the value.

No doubt the conversation Sally and Tom need to have after her meeting with the estate lawyer will be awkward.  After all, how do you tell your spouse you have the ability to keep your inherited funds separate from your together assets, just in case your relationship breaks down in the future?  While it may be awkward, it is essential to have the conversation.  Here are 10 things to think about, consider and discuss:

  1. How secure do you feel in your relationship today?
  2. How do you feel about giving up ½ your inheritance if your relationship broke down in the future?
  3. Did whoever left you the inheritance express any intention regarding how these funds should be used / their view on if the funds are for you or for you and your partner/family?
  4. If your relationship had broken down yesterday and you were to split your assets in half, would you be okay financially? If not, how far would your inheritance go to bridging a financial gap?
  5. What is your spouse’s prospects for an inheritance – how did they, or how would they treat theirs?
  6. How would you react / feel if your partner decided to keep their inheritance separate from you?
  7. Do you already have a legal agreement that covers how future inheritances would be treated?
  8. Is it possible to come to a written agreement that protects your inheritance should you use the funds for joint purposes now but separate or divorce in the future?
  9. If you are in a blended family situation and your relationship broke down, how would you feel, about ½ of your inheritance potentially going to someone else’s children in the future?
  10. Are you feeling excessive pressure to do something with your inheritance that you aren’t comfortable with? (If the answer is yes, this is a big red flashing warning sign).

 

In the end, Sally may very well decide to put the funds towards their mortgage.   She may choose to contribute to her TFSA and gift Tom the money to contribute to his TFSA as a means of tax-efficiently savings towards their eventual retirement.   She may choose to do this with or without the protection of a formal agreement outlining how the value of her inheritance would be handled should their relationship breakdown in the future.  Or, she may just decide to keep everything she receives in her own name.  In making these decisions though, Sally needs to be fully informed.   She needs to know where she stands today, what her preferences, views and values are.   And she needs to be able to make this decision without significant negative pressure.

Like all financial decisions, being informed is key.   If you are anticipating an inheritance, it is very important to get independent legal and financial advice.  Understand your risks, understand your options, and make informed decisions.  The stakes are too high not to.

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