Divorce is often a mentally and emotionally taxing experience as it is, but further complications can arise if you’re not prepared. A large part of our expertise is in helping families plan ahead to prevent both distress and loss of assets. One example is the issue of divorce and inheritance.
Jurisdiction of Assets and Residence Matters
You might plan based on Alberta law and then your children’s inheritance is received when they are resident in another province or country. Another possibility is that while you and your children are Alberta residents, an asset bequeathed to them is located in a different jurisdiction. Suddenly, assets may be at risk if there is a divorce.
Commingling of Assets
One key principle to understand in the context of divorce and inheritance is the commingling of assets. Whether the inheritance is cash, a vehicle, real estate, or shares, it could become part of the joint marital assets if you’re not careful. It’s wise to avoid depositing a cash inheritance into an account held jointly with your spouse, for instance. Even the act of one spouse maintaining a physical property inherited by the other can result in commingling of rights to ownership. Depending on the divorce laws of the given region, inheritances that have commingled with marital property may have to be divided 50/50 or otherwise allocated by a judge.
Inheritance You Receive
If you want to avoid the depletion of an inheritance that you received, your situation will depend significantly on how well you planned ahead to avoid the commingling of your inheritance with your spouse’s property. This is one of many instances where a premarital agreement is particularly useful. If your inheritance or part of your inheritance has become part of the marital assets and you did not want it to, it is possible to build a defence in the event of divorce to demonstrate this and retain the inheritance in full. The burden of proof in this case is quite high, however, so it’s best to avoid this proactively.
Inheritance You Leave Behind
It’s also important to know how you can protect an inheritance you leave behind. In this case it’s effective to set up a testamentary trust via your will. This can shelter the inheritance and spare your beneficiaries the perils of unintended commingling. In addition to this primary function, an inherited asset trust also offers the usual benefits of trusts in general. This includes protection from creditors and detailed control over what conditions need to be met in order for the beneficiary to receive the assets. This is perfect for incentivizing the beneficiary or rewarding them for accomplishments, as mentioned in one of our recent articles.
Inheritance is a broad and complex subject, whether or not divorce is involved. MacMillan Estate Planning is there to help you navigate this and other aspects of your estate plan with the utmost tact and skill. Call 1-833-266-6464 to schedule a complimentary consultation with our team.