An inheritance is more than just a transfer of wealth to your loved ones – it’s a legacy, a reflection of years of hard work and sacrifice. An inheritance can include assets such as money, property and family heirlooms. Regardless of the form, protecting your inheritance is essential to ensure it continues to reflect your intentions and benefit your future generations.
In this article, we explore effective strategies for safeguarding your inheritance and ensuring it continues to serve its intended purpose.
Breakdown of a relationship
The Family Property Act (Manitoba) (the “FPA”) governs the division of assets between spouses and common-law partners upon the breakdown of a relationship. However, subsection 7(3) of the FPA states that an inheritance is not subject to asset division and, as such, is not shareable with a former spouse or common-law partner.
Caution, however, that any income from, or appreciation in the value of, an asset acquired by way of inheritance will be shareable if the income or appreciation is used for the benefit of the family or for the purchase of a family asset.
There are several ways to protect an inheritance from becoming a family asset and thus shareable under the FPA, some of which are discussed further below.
Separate bank accounts
An individual who receives an inheritance should consider opening a separate bank account in their name only, with any interest earned on the inheritance accumulating in that sole account. It is important not to deposit any other funds into this account as that would make it difficult to distinguish between inherited money and other assets as the two would essentially become comingled in that one account. Keeping only the inherited assets in the account makes it easy to trace the origin of the money. If any outside party were to look at the account, it will be clear that no joint assets were ever added thereto.
Family property
If you receive a large inheritance that you wish to protect from being shareable with your spouse or common-law partner, it is important not to use your inheritance to purchase property that is intended to benefit both you and your spouse or common-law partner. You should not use the inheritance to purchase property that you then place in both your name and your partner’s name. In such a case, the court will likely presume that you intended to make a gift to your spouse and the property will be shareable. Also, using your inheritance to pay down a mortgage on a property owned by both partners turns the inheritance into joint property.
If your inheritance is not money but rather an asset such as an heirloom, do not sell the asset and use the income from it to purchase property intended to benefit both you and your spouse or common-law partner. This converts the inheritance to a shareable asset.
Estate planning documents
If you receive a large inheritance, it is important to ensure that your estate planning documents are up to date and reflect your current wishes. Without a valid Will, upon your death, your assets will be distributed pursuant to The Intestate Succession Act (Manitoba) which can have unintended consequences. A properly drafted Will ensures that your inheritance will continue to benefit future generations in accordance with your wishes.
If you intend to gift a large inheritance to your children or your grandchildren, it is important to ensure that your Will clearly states that the gift or bequest is intended solely for the individual who is meant to receive and benefit from it. Language should be included in your Will that specifically excludes others from sharing in the gift or bequest to demonstrate that the gift was intended to benefit only the designated recipient. Your Will should reflect that the gift is an inheritance for purposes of the FPA.
Furthermore, you may consider leaving the inheritance in a testamentary trust for the benefit of your children or grandchildren. This testamentary trust can be structured in a way that the income derived from the underlying assets held in the trust can be paid to the beneficiary with limited discretion with respect to the distribution of the underlying capital of such trust. Alternatively, the trust may only distribute a portion of the inheritance at specified times, limiting the amount that can become a shareable asset.
Consult with a legal professional
Preparing estate planning documents that reflect your intentions and to ensure that any inheritance passed on to the next generation is safeguarded is a personal decision, requiring careful consideration of your specific circumstances. The trusts & estates and taxation lawyers at MLT Aikins can assist you with tailored estate planning solutions to support your needs.
While this article focuses on Manitoba, our team has legal professionals based across Western Canada who can support individuals in different jurisdictions.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.
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