Overview
Receiving an inheritance is often a bittersweet event, marking the loss of a loved one while providing financial security for the future. For many people in relationships, the assumption is that money or property inherited from a parent or relative belongs solely to them. While this is generally the starting point under British Columbia law, the reality is far more nuanced.
Under the BC Family Law Act, inheritances are categorized as excluded property. This means that, in theory, they are not subject to the standard 50/50 division of assets that occurs upon separation or divorce. However, there are significant legal traps that can inadvertently convert your separate inheritance into family property, potentially costing you half of your legacy.
Understanding Excluded Property in BC
The BC Family Law Act distinguishes between family property and excluded property. Family property includes assets acquired by either spouse during the relationship, which are generally divided equally. Excluded property includes assets acquired before the relationship began, and specific types of assets acquired during the relationship, most notably gifts and inheritances.
On the surface, this seems straightforward. If you inherit $100,000 from your grandmother, that money is yours. If you separate from your spouse, you leave with that $100,000 before the remaining assets are split. However, the protection of excluded property is not absolute. It relies heavily on how you treat those assets after you receive them.
The Trap of Commingling Assets
The most common way people lose the protection of excluded property is through commingling. This occurs when you mix your inheritance with family assets. While the Family Law Act allows you to trace excluded funds into new assets, the burden of proof is entirely on you to demonstrate exactly where that money went.
For example, if you deposit your inheritance into a joint bank account that is also used for mortgage payments, grocery bills, and vacations, the funds become mixed. If you cannot clearly trace which dollar was inheritance and which was family income, a judge may rule that the inheritance has lost its excluded status and has become family property.
Similarly, if you use your inheritance to pay down a mortgage on a matrimonial home registered in both names, you generally retain the right to claim that exclusion. However, if the paper trail is lost or ambiguous, the presumption may shift. The law has evolved significantly regarding property transferred into joint names, but relying on the courts to untangle the finances is risky and expensive.
The Growth in Value Trap
Another critical distinction in BC law involves the difference between the original value of the inheritance and the growth of that asset. The Family Law Act states that while the starting value of excluded property remains with the original owner, any increase in value that occurs during the relationship is considered family property.
Consider a scenario where you inherit a rental property worth $500,000. Over the next ten years, the market booms, and the property is worth $900,000 at the time of your separation. The initial $500,000 remains your excluded property. However, the $400,000 increase in value is subject to division. Your spouse would generally be entitled to half of that growth, or $200,000.
This applies to investment accounts as well. If you inherit a stock portfolio, the principal is yours, but the dividends and capital gains accrued during the relationship are divisible family assets.
The Burden of Proof is on You
In British Columbia courts, the onus is on the person claiming the exclusion to prove it. This is where many individuals fail. If you received an inheritance twenty years ago and used it to buy a cabin, renovate a kitchen, or pay off debts, you must provide documentation evidencing that transaction.
If you cannot produce bank statements, transfer receipts, or wills demonstrating the source of the funds and their specific application to an existing asset, the court may presume the asset is family property. In the eyes of the law, if you cannot prove it is excluded, it is likely shared.
Best Practices to Protect Your Inheritance
To ensure your inheritance remains yours, you must take proactive steps to maintain its excluded status.
Keep Funds Separate
Do not deposit inheritance cheques into joint accounts. Open a separate account in your name only. If you intend to use the funds to purchase a family asset, such as a vehicle or real estate, ensure the paper trail is impeccable. Keep copies of the cheque, the deposit slip, and the withdrawal for the purchase.
Enter a Cohabitation or Marriage Agreement
The most secure way to protect an inheritance is to opt out of the standard property division regime through a domestic contract. A marriage agreement (prenup) or cohabitation agreement can explicitly state that your inheritance, and any growth in its value, will remain yours in the event of a separation.
Maintain Meticulous Records
Bank records are not kept indefinitely. Financial institutions often purge records after seven years. It is your responsibility to download and save digital copies of all relevant financial documents immediately. Do not rely on the bank to have proof of your inheritance a decade from now.
Navigating property division in British Columbia requires a clear understanding of the law. If you have received a significant inheritance or anticipate one, consulting with a family lawyer can help you structure your assets to prevent the excluded property trap.