Protecting Inheritance and Family Gifts through Marriage Contracts

Why Protect Inheritance and Family Gifts?

Inheritance and family gifts often carry both financial and sentimental value. In Ontario, these assets may be excluded from division during a divorce — but only under specific circumstances. Understanding how the law treats them, and how a marriage contract can provide extra protection, is crucial for anyone entering marriage with significant family assets.

Excluded Property under Ontario Law

Under the Family Law Act, certain types of property are excluded from the calculation of Net Family Property (NFP) when spouses separate. This includes:

• Inheritances received during the marriage.
• Gifts from third parties (such as parents, grandparents, or relatives) received during the marriage.

However, the exclusion is not automatic in all situations. To keep these assets excluded, you must be able to:

• Prove they were a gift or inheritance.
• Show that they were kept separate from marital property.
• Demonstrate their current value at the date of separation.

If you cannot prove these elements, the assets may be considered part of the divisible marital property.

Risks Without a Marriage Contract

While Ontario’s law provides some protection for inheritances and family gifts, there are significant risks if you rely on the statute alone. Without a clear marriage contract, you could lose the exclusion in several ways:

1. Commingling Assets
   If you mix inherited or gifted funds with joint accounts or use them for shared investments, they may lose their excluded status. For example:
   • Depositing an inheritance into a joint savings account.
   • Using gifted funds for renovations to jointly owned property.
2. Losing Exclusion for the Matrimonial Home
   Under Ontario law, the matrimonial home is treated differently. If you use inheritance or gifted funds to purchase, pay down the mortgage, or improve the matrimonial home, the value is no longer excluded — even if the money originally came from a gift or inheritance. This means:
   • An inheritance used to buy a family home becomes part of the divisible assets.
   • Any appreciation in the home’s value is also shared upon separation.
3. Using Inherited Property for Joint Expenses
   Spending inherited or gifted funds on household expenses, vacations, or other shared costs can make it difficult to trace and prove the funds’ origin, leading to loss of exclusion.

By creating a marriage contract, spouses can agree in advance on how inheritance and family gifts will be treated, ensuring they remain protected regardless of how they are used or where they are kept. This can provide clarity, reduce disputes, and preserve family wealth for future generations.

How a Marriage Contract Safeguards These Assets

A marriage contract (also known as a prenuptial or postnuptial agreement) allows spouses to take control over how inheritances and family gifts will be treated if the marriage ends. By setting clear terms in advance, you can prevent misunderstandings and legal disputes, ensuring these assets remain in the family.

Clear Identification of Assets

One of the most important steps in protecting inheritance and family gifts is to clearly identify them in the contract. This includes:

• Listing each asset specifically — for example, “$100,000 inheritance from John Smith’s estate received on [date]” or “diamond necklace gifted by maternal grandmother in 2020.”
• Providing supporting documentation such as wills, gift letters, bank statements, or appraisal reports to establish the asset’s origin and value at the time it was received.
• Defining ownership so there is no ambiguity about which spouse the asset belongs to.

Terms for Asset Exclusion

A marriage contract can explicitly state that certain assets — and any proceeds derived from them — will be excluded from the division of property if the marriage ends. Common provisions include:

• Confirming that inheritances and family gifts remain the sole property of the receiving spouse.
• Ensuring that even if the funds are placed in a joint account or used for shared purposes, they will still be excluded from Net Family Property calculations.
• Overriding the default Ontario law regarding the matrimonial home, if both parties agree, to protect assets used toward its purchase or maintenance.

Protecting Growth in Value

Ontario’s default rules allow for excluding the initial value of an inheritance or gift, but any increase in value during the marriage may be subject to division. A marriage contract can address this by:

• Stating that both the original value and any appreciation will remain excluded from property division.
• Defining how appreciation will be calculated and documented.
• Clarifying treatment of investment income or gains generated by the inherited or gifted property.

By documenting assets clearly, setting firm exclusion terms, and addressing future growth, a marriage contract gives couples a legally binding framework to safeguard family wealth while avoiding potential disputes during separation.

Key Clauses to Include for Inheritance and Gifts

A well-drafted marriage contract can provide detailed, enforceable provisions to protect both current and future inheritances and family gifts. When working with an Ontario family lawyer, consider including the following clauses:

Description of Property at the Start of the Marriage

Begin the agreement with a comprehensive schedule of assets owned by each spouse before the marriage. For inheritances or gifts already received, include:

• A detailed description of each asset (e.g., “$50,000 inheritance from the estate of Mary Thompson, received in June 2022”).
• Documentation showing the asset’s origin and value at the time of receipt.
• Whether the asset is cash, property, investments, or personal items.

Terms for Future Inheritances and Gifts Received During Marriage

Address how inheritances or gifts acquired after the wedding will be handled. The contract can:

• Confirm they will remain the sole property of the receiving spouse.
• Specify that the value and any appreciation will be excluded from property division.
• Require the receiving spouse to maintain clear records and separate accounts for these funds or items.

Rules for Selling, Investing, or Transferring Inherited Property

To avoid losing exclusion status, the contract should outline:

• Whether inherited funds can be invested jointly without losing protection.
• How to trace proceeds if an inherited asset is sold or converted into another form.
• Rules for transferring inherited property into trusts, corporations, or other vehicles.

Provisions for the Matrimonial Home if Purchased or Improved with Inheritance Funds

Ontario law removes the exclusion for assets used toward the matrimonial home. A marriage contract can override this default by:

• Stating that any inheritance or gift applied to the purchase, mortgage, or renovations of the matrimonial home remains excluded from division.
• Defining how to calculate and protect the proportion of the home’s value linked to the inheritance.
• Clarifying what happens if the home is sold or replaced during the marriage.

Common Mistakes to Avoid in Protecting Inheritance

Even with Ontario’s legal framework and a carefully drafted marriage contract, certain mistakes can jeopardize your ability to keep inheritances and family gifts excluded from property division. Being aware of these pitfalls can help you safeguard your assets more effectively.

Failing to Keep Detailed Records of Inheritance and Gift Transactions

One of the biggest challenges in proving an asset’s excluded status is the lack of clear documentation. Without accurate records, it becomes difficult to show the court the origin, value, and ownership of the asset. To avoid this:

• Keep copies of wills, gift letters, bank statements, and receipts.
• Maintain separate accounts for inherited funds.
• Retain appraisals for valuable personal property such as jewellery, antiques, or art.

Using Inherited Funds for Joint Assets without Clear Contractual Terms

Mixing inheritance or gift money with marital property — especially when purchasing or upgrading a matrimonial home — can eliminate its excluded status under Ontario law. Without clear provisions in a marriage contract, you risk:

• Losing both the original amount and any appreciation.
• Facing disputes over how the funds were used and whether they should be shared.

A properly drafted marriage contract can preserve your rights even if you choose to invest inherited funds in joint assets, but it must include precise language.

Not Updating the Marriage Contract after Receiving New Assets

A marriage contract is not a one-time document — it should be updated as circumstances change. Common oversights include:

• Receiving a significant inheritance years into the marriage and assuming it’s automatically protected.
• Failing to add newly received family gifts to the contract’s asset schedule.
• Not revisiting the agreement when property is sold, invested, or converted into another form.

Regularly reviewing and updating the marriage contract ensures that all relevant assets remain covered, reducing the risk of disputes in the event of separation.

Updating a Marriage Contract over Time

A marriage contract is most effective when it reflects your current financial and personal circumstances. In Ontario, failing to update the agreement as life changes can leave important assets unprotected or cause provisions to become outdated.

Life Changes That May Require Revisions

Certain events can significantly affect the terms of your marriage contract and may warrant amendments, including:

• New inheritance or family gifts — Adding these to the contract ensures they remain excluded from property division.
• Purchase of property — Especially if inheritance funds are used toward a matrimonial home or investment property.
• Birth or adoption of children — While a marriage contract cannot predetermine custody or child support, changes in family structure may influence financial arrangements.
• Significant changes in asset value — Growth in investments, real estate appreciation, or business expansion may require updated provisions.
• Changes in income or career — Job loss, business success, or retirement can all impact how the agreement should operate.

How to Amend or Replace an Existing Marriage Contract

Under Ontario’s Family Law Act, spouses can amend or replace a marriage contract at any time, provided both give informed and voluntary consent. The process typically involves:

1. Reviewing the existing agreement with a family lawyer to identify areas needing changes.
2. Negotiating new terms that reflect the updated circumstances.
3. Drafting an amendment or preparing a new marriage contract entirely.
4. Exchanging full financial disclosure to ensure the agreement remains enforceable.
5. Obtaining independent legal advice for each spouse before signing.

Regularly reviewing and updating your marriage contract — ideally every few years or after major life events — ensures that it remains relevant, enforceable, and effective in protecting inheritances, family gifts, and other important assets.