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What Happens to Inheritances in a Divorce in Alberta?
Family Law
What Happens to Inheritances in a Divorce in Alberta?
10 min read
What Happens to an Inheritance in a Divorce in Alberta?
Introduction
Receiving an inheritance can significantly change a family's financial circumstances.
Someone may inherit cash, investments, a family cottage, real estate, shares in a business or other valuable property. The inheritance might then be invested, used to purchase a family home or spent on the family's expenses.
Years later, if the marriage ends, an important question often arises:
Do I have to share my inheritance with my spouse?
In Alberta, an inheritance received by one spouse may qualify as exempt property under the Family Property Act.
However, that does not necessarily mean that every dollar connected to the inheritance will automatically remain outside the property division.
The value of the inheritance when it was received, what happened to it afterward, whether it increased in value and whether the inherited property can still be identified or traced may all become important.
Are Inheritances Exempt Property in Alberta?
Generally, property acquired by a spouse by inheritance is one of the categories of property that may be exempt from distribution under Alberta's Family Property Act.
This can apply even when the inheritance is received during the marriage.
For example, suppose Jennifer's mother dies while Jennifer is married.
Under her mother's estate, Jennifer receives $150,000.
Jennifer deposits the money into an investment account held solely in her name and keeps the estate and banking documents showing where the money came from.
If Jennifer and her husband later separate, the inherited property may support an exemption claim.
The important point is that receiving an inheritance during a marriage does not automatically convert it into property that must simply be divided equally.
Does My Spouse Get Half of My Inheritance?
Not automatically.
A common concern is:
"I inherited $200,000 while we were married. Does my spouse now get $100,000?"
That is not necessarily how Alberta's family property legislation works.
If the inheritance qualifies for an exemption and can be established with evidence, its exempt value may be treated differently from ordinary property accumulated during the relationship.
However, the analysis becomes more complicated when the inheritance has:
increased in value;
been invested;
been deposited into joint accounts;
been used to purchase property;
been used to pay down a mortgage;
been transferred into another spouse's name; or
been spent.
The word "inheritance" is therefore the beginning of the analysis, not necessarily the end.
What Happens If the Inheritance Increases in Value?
This is one of the most important distinctions in Alberta family property law.
The Family Property Act treats the original exempt value differently from an increase in the value of exempt property.
Suppose Michael inherits an investment portfolio worth $200,000.
He keeps the investments throughout his marriage.
At separation, the portfolio is worth $350,000.
The original $200,000 and the additional $150,000 do not necessarily receive identical treatment.
While the original inherited value may qualify for an exemption, the increase in value may be distributed by a Court in a manner it considers just and equitable, taking into account the factors in the legislation.
This distinction can be particularly important when an inheritance consists of appreciating property such as:
investments;
real estate;
business shares;
farmland; or
a cottage or recreational property.
What If I Inherit a House?
The same principles can apply when the inherited property is real estate rather than cash.
Suppose Sarah inherits her father's house.
At the time she receives it, the property is worth $500,000.
Sarah and her husband keep the house as a rental property.
Fifteen years later, when they separate, it is worth $850,000.
Sarah may have an exemption claim relating to the value of the property when she inherited it.
However, the increase in value may need to be analyzed separately.
Other issues can also arise if family money was used to renovate the property, pay expenses or reduce debt secured against it.
The history of the asset matters.
What If I Use My Inheritance to Buy a Family Home?
This is where inheritance claims can become significantly more complicated.
Suppose Amanda inherits $200,000 from her grandmother.
Amanda and her husband use the entire amount as a down payment on a Calgary home that becomes their family residence.
Years later, they divorce.
Amanda may assume:
"The first $200,000 of equity belongs to me because it came from my inheritance."
Her husband may respond:
"You put it into our jointly owned family home. It became family property."
The legal analysis may involve questions about the exemption, tracing, how the property was acquired and held, and the applicable provisions of Alberta's Family Property Act.
A spouse should therefore not automatically assume either that the inheritance has disappeared for family property purposes or that they are guaranteed to receive the exact amount back.
Where a substantial inheritance has been used toward a jointly held home, legal advice can be particularly important.
What If I Use an Inheritance to Pay Down the Mortgage?
A similar issue can arise when inherited funds are used to reduce a mortgage.
For example, a spouse receives a $100,000 inheritance and uses it to make a lump-sum payment against the mortgage on the family home.
The cash is now gone, but its value may have contributed to increased equity in the house.
Determining whether and to what extent an exemption can be established may require tracing the inherited funds into the property.
Bank statements, estate documents and mortgage records can become important evidence.
What Does Tracing an Inheritance Mean?
Tracing means showing what happened to the inherited property after it was received.
Consider this example.
Laura inherits $125,000.
She deposits it into her personal bank account.
Three months later, she transfers the money into an investment account.
Several years later, she sells those investments and uses the proceeds to purchase another asset.
At separation, the original inheritance no longer exists in the form of cash.
However, financial records may allow Laura to show the path from the original inheritance to the property that exists today.
That connection can be important when establishing an exemption claim.
What If I Put the Inheritance Into a Joint Bank Account?
This can make tracing considerably more difficult.
Suppose you inherit $100,000 and deposit it into the joint chequing account you share with your spouse.
Over the next five years, that account is used for:
mortgage payments;
groceries;
vacations;
credit card payments;
vehicle purchases;
home renovations; and
ordinary family expenses.
Eventually, the account balance falls to $10,000.
It may be difficult to simply claim:
"There is still $100,000 of my inheritance somewhere in our property."
The more inherited money is mixed with other funds and spent through ordinary transactions, the more complicated tracing may become.
This is why financial records are so important.
What If I Spend the Inheritance?
If an inheritance has been completely spent and no identifiable property remains, there may be little or nothing left to divide or claim as exempt property.
For example, suppose a spouse inherits $50,000 and the couple spends it over several years on vacations and ordinary living expenses.
At separation, the money is gone.
That situation is very different from an inheritance that was used to purchase an investment or another identifiable asset that still exists.
This is another reason the history of the inherited property matters.
What If I Inherit Money After Separation?
Timing can make a significant difference.
An inheritance received after separation may raise different property issues from one received years earlier during the relationship.
The precise dates and circumstances should be reviewed before determining whether the inheritance has any role in the spouses' property claims.
If you expect to receive a significant inheritance while a separation or family property dispute is ongoing, it can be helpful to obtain legal advice before mixing those funds with existing family assets.
What If My Spouse Is Expecting an Inheritance?
An expected inheritance is not necessarily the same thing as property that a person currently owns.
A parent or grandparent may still be alive and may change their will. The value of an estate may change. Assets may be sold or spent. Other claims may arise against the estate.
For that reason, a future inheritance that someone merely expects to receive should not automatically be treated as though the money is already sitting in their bank account.
The analysis may be different once a person has actually acquired property through an estate.
What If Both Spouses Receive an Inheritance?
Each inheritance should be considered separately.
Suppose the husband inherited $250,000 from his parents and the wife inherited $100,000 from hers.
It would not necessarily be appropriate simply to subtract one inheritance from the other.
Each spouse may need to establish:
what they inherited;
when they received it;
its value at the relevant time;
what happened to the property; and
whether it can still be traced.
The fact that both spouses have potential exemptions does not eliminate the need to properly identify and value them.
What Documents Should I Keep?
If you receive a significant inheritance, good documentation can make an enormous difference if you later separate.
Useful records can include:
the deceased person's will;
estate accounting documents;
correspondence from the executor;
probate or estate documents;
cheques or wire-transfer records;
bank statements showing receipt of the funds;
investment statements;
property appraisals;
real estate transfer documents; and
records showing what was subsequently purchased with the inheritance.
These records can help establish both the source and value of the inherited property.
What If I Cannot Find the Estate Documents?
Do not assume the exemption is lost without first investigating.
Depending on the circumstances, documents may be available from:
the executor or administrator of the estate;
the estate lawyer;
financial institutions;
investment advisors;
accountants;
land records; or
other sources.
If the inheritance was received many years ago, gathering evidence may take time.
Starting early is often helpful.
Can a Marriage Contract Protect an Inheritance?
Spouses can use a marriage contract to address property rights, including how certain assets will be treated if the relationship ends.
This can be particularly useful where one spouse expects to receive significant family wealth, business interests, real estate or other inherited property.
The agreement can provide greater certainty than relying on the parties to reconstruct decades of financial transactions after separation.
However, domestic agreements must be properly prepared and executed to address Alberta's legal requirements.
Independent legal advice is particularly important.
Should I Keep an Inheritance Separate?
Keeping inherited property clearly identifiable can make the financial history easier to establish.
For example, maintaining inherited investments in a separate account may produce a much clearer paper trail than depositing them into an account used for hundreds of family transactions.
However, simply keeping an account in one spouse's name does not, by itself, answer every family property question.
The source, value, growth and use of the property still matter.
If the inheritance is substantial, obtaining legal and financial advice when it is received may prevent significant problems later.
Don't Assume an Inheritance Is Automatically Safe
An inheritance may qualify for an exemption, but the circumstances can change considerably over time.
Ask:
What did you inherit?
When did you receive it?
What was it worth?
Where was it deposited?
Was it invested?
Was it mixed with other money?
Was it used toward the family home?
Has it increased in value?
Can you prove where it came from?
Can you trace what happened to it?
Those questions may determine whether a potentially significant exemption can actually be established.
How Bridgestone Law Can Help
Inheritance claims can have a major impact on property division following an Alberta divorce.
At Bridgestone Law, our Calgary family lawyers can help determine whether inherited property may qualify for an exemption under Alberta's Family Property Act and what evidence is needed to establish the claim.
We can assist with inheritances involving:
cash;
investments;
homes and other real estate;
family cottages;
farmland;
business interests;
shares; and
other valuable property.
We can also help trace inherited funds through bank accounts, investments, real estate purchases and other transactions.
Where necessary, we can work with accountants, appraisers, business valuators and other financial professionals to establish historical and current values.
If you received a substantial inheritance, do not assume that it must automatically be shared equally with your spouse.
At the same time, do not assume that everything connected to an inheritance will necessarily remain exempt forever.
The source, value, growth, use and traceability of the inherited property all matter.
If you are separating or divorcing in Alberta and an inheritance is part of your property situation, contact Bridgestone Law to speak with a Calgary family lawyer about protecting your property interests.
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