When family units break down due to separation and divorce, one of the most fundamental aspects involved in finalizing a complete split is determining the proper division of property.
The Matrimonial Property Act (“MPA”) applies only to married couples (although a Bill has been introduced by our Legislature that would amend the Matrimonial Property Act to apply to common law partnerships as well), and provides for the manner in which matrimonial property, inclusive of both assets and debts, should be divided.
In general, the starting point for the division of matrimonial property is that of an equal division between the parties. However, this is subject to the Court being able to consider any number of facts or circumstances that might make an equal division unfair. In such circumstances, if the Court, after considering all relevant circumstances, finds that it would not be equitable to distribute or divide property in an equal manner, the Court has the authority to order that property be divided unequally between divorcing spouses.
However, before any decision as to how matrimonial property should be divided is made, the question as to “what is matrimonial property” must always be considered. Under the MPA, matrimonial property is, at its basest form, property acquired by a spouse during marriage. Within this category of property are different subsets of property that are not assumed to be divided equally, like other matrimonial property. These include:
- The increase in value of property that was owned prior to marriage;
- Property acquired during the marriage that is purchased with income derived from pre-marital property;
- Property that is acquired by a spouse after an official recognition of separation; and
- Property that is gifted from one spouse to the other, during the time of marriage.
For these items of property, the Court’s default position is to determine what would be a just an equitable manner of distribution.
However, notwithstanding the base definition of matrimonial property as property acquired during the course of marriage, certain specific items of property are not considered matrimonial property and, under the MPA, are considered to be exempt from distribution – meaning, the party who has such property does not have to share it upon the dissolution of the marriage.
While it seems fairly straightforward, identifying and proving an asset as exempt and continuing to maintain its exempt status through to the end of the marriage is not always so simple. We often see issues arise in this regard, particularly in respect of inheritances received during the course of the marriage.
Under the MPA, any property acquired by a spouse by inheritance is considered to be exempt from distribution, and is not considered matrimonial property. However, any party receiving an inheritance during their marriage should be aware that the character of this asset can change, or be lost, depending on how the asset is used.
For instance, married parties will often take their inheritance and place it into a joint account with their spouse, or use it to pay of jointly held debt, such as a mortgage or a line of credit. In these cases, the exempt character of the inheritance can be lost either in part or in full.
As an example, a spouse who deposits their inheritance into a joint account, or buys assets in the joint names of both parties is often seen to have gifted a portion of the exempt asset to the other party. For instance, if a wife inherited $100,000 and placed the entire amount into a joint account with her husband, the Court often views this as the wife gifting half of the $100,000 to the marriage – thereby making $50,000 matrimonial property and subject to division. If the wife had only placed $50,000 into the joint account, the Court would likely view only $25,000 as being gifted to the marriage.
As another example, if the wife used the full $100,000 to pay down the mortgage on the jointly held home, the available equity in the home would increase by $100,000, but because it is a joint asset, it is likely that the Court would again view the wife as having gifted $50,000 of that equity as being gifted to the marriage and available for division with both parties.
In these cases, as a result of placing the inheritance in a jointly held vehicle, a portion of the exempt character would be diminished.
However, had the wife used the $100,000 to pay down an unsecured line of credit, the inheritance would be depleted in total and the entirety of the exempt asset would be lost. This might mean little if the line of credit was solely held in the wife’s name; however, if the line of credit was in both parties names, the use of the inheritance is almost like a complete gift of half the inheritance to the husband. This is because at the end of the marriage, had the line of credit not been paid down, each party would, at first instance be responsible for half of the line of credit. Had the wife not used her inheritance to pay down the entire amount of the line of credit, at the end of the marriage, she could use half the inheritance to pay off her half of the line of credit and still be left with $50,000 of inheritance as an exempt asset (assuming she had deposited it into an account solely in her name, and not spent it).
It is also common that when a spouse receives an inheritance, parts of the inheritance (or the whole, depending on how much was inherited) are often used to take the family on holidays, or purchase other consumable goods. In such a case, that portion of the inheritance is lost and cannot be reclaimed as “exempt” at a later date as there is no asset that can be traced as having been derived from the use of the inheritance.
Spouses will often also use inheritance to either purchase a new vehicle, or pay out the financing on a currently owned vehicle. In such a case, as the property is an item that loses its value over time, the exempt portion of that asset also diminishes. For instance, if the wife used $50,000 of her inheritance to purchase a new vehicle, if the parties separate five years later when the vehicle is worth $20,000, the Wife would only be able to assert an exemption claim over the present value of the vehicle, not the original $50,000.
Matters become even more complex when a party comingles their inheritance with funds that are considered matrimonial property, or fails to trace the use of the exempt assets. For example, if a spouse deposited their inheritance into a savings account that contained matrimonial property, and then over the course of ten years spent funds from this account and also deposited new funds to this account, the ability to adequately trace what amounts in the account might continue to be from the inheritance becomes very murky, and potentially hard to prove for the purposes of division of property.
Ultimately, spouses need to be aware of the complexities of securing their inheritance as exempt and of the potential risks of losing the exempt status over inheritance, depending on how it is used.
The lawyers at Mincher Koeman LLP have substantial experience in assisting people with preserving their inheritance through advice and the drafting of marriage contracts that can be signed by both spouses with a view to protecting the inheritance. If you have received an inheritance, or expect to receive an inheritance, and are looking for assistance to ensure that it is protected in the event of a future divorce, Mincher Koeman LLP can help you. Give us a call at (403) 910-3000 or email us at email@example.com.