22 May Protecting Your Inheritance in Divorce: Important Tips for Safeguarding your Assets

When separating from one’s spouse, clients are often surprised that certain assets may be classified as “family property” and divided.  To protect certain assets from division, we outline strategies to shield excluded property, focusing on relevant legal principles, case law and practical steps to safeguard such assets.

Definition of Excluded Property

In addition to inheritances, excluded property typically includes property acquired by one spouse before the relationship started, gifts from third parties and certain damages or settlement from personal injury awards. Section 85 of the Family Law Act was amended in May 2023 to clarify that property will remain excluded even if a spouse transfers their legal or beneficial interest in a property to the other spouse. For example, if a property was purchased in joint names using one spouse’s inheritance, the amount of the inheritance may remain excluded from division. It is important to note that this amendment will only apply to cases filed after May 11, 2023.

Strategies to Protect Excluded Property

1. 1. Documentation and Record-Keeping: Maintain detailed records of all excluded property, including purchase documents, inheritance records and documentation of gifts. Keep separate accounts for excluded property to avoid commingling with family property.
   2. Cohabitation, Prenuptial and Marriage Agreements: Draft clear and comprehensive agreements outlining the treatment of excluded property. Encourage both parties to obtain independent legal advice to strengthen enforceability.
   3. Trusts: Utilize trusts to manage and protect excluded property. For example, discretionary trusts may provide asset protection while allowing some flexibility in the use of funds.
   4. Proper Estate Planning: Update wills and estate plans regularly to reflect changes in excluded property. Use testamentary trusts to manage inheritance for beneficiaries, to make best efforts to ensure the property remains excluded.
   5. Careful Asset Management: Avoid using excluded property for family expenses or investments. Reinvest proceeds from excluded property into new excluded property, maintaining a clear paper trail.

Protecting excluded property from division upon separation requires a proactive and strategic approach, combining thorough documentation, clear agreements and prudent financial management. By implementing these strategies, you can help safeguard your assets and articulate your intentions in the event of separation.

The lawyers at YSM Family Law  are happy to discuss how to implement the strategies outlined above and to recommend which approach will best meet your needs.