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Careful what you leave behind

Know the rules to protect inheritance

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Bob and Sally have three adult children. All three are married. The marriages appear to be solid, but Bob and Sally have learned that even solid marriages have a way of breaking up. Bad things sometimes happen to good people.

They are scratching their heads when it comes time to draft their wills. Bob will leave everything to Sally if he dies first, and vice versa. After both of them are gone, the plan is to divide their wealth into three equal shares, one for each of the children.

If they are worried about any one of their children, it is their daughter, Samantha. What happens if Samantha inherits and her husband leaves her the next day? Will he be entitled to take half of the inheritance with him when he goes?

First, some good news. As a general rule, anything a person inherits does not get split up if they separate. That is true of the original property that is inherited and of any appreciation in value on that property. If Samantha's husband leaves her, she should be able to thumb her nose at him and keep the inherited property as her own.

Unfortunately, there are some nasty exceptions to the general rule. First, Samantha might inherit and use the money to pay off the mortgage on the family home, or buy a cottage for use by her and her husband. What happens if he dumps her shortly after? He will be able to share equally in all of the amounts she has used to pay off or acquire family assets. Ouch. That can amount to a lot of money.

Instead, if she knows her marriage is on the rocks, she can invest the money in a separate account. She might ask the financial institution to label the account as her "inheritance account" to keep things clear. Since the investment account is not a family-use asset, she should be safe. If the money is kept pure, then all is well.

That takes us to the second nasty exception. The trouble comes if she adds her own money to the account. If the inherited money is blended with non-inherited money, it quickly loses its character as an inheritance. The individual loonies do not have labels on them to show which dollar was inherited and which was not. She might inherit and be smart enough to put the inheritance into a separate account, but then start adding $100 from each of her paycheques to the account. If her husband leaves her a year later, the money will have been hopelessly blended and the entire account becomes shareable -- every shiny penny.

How do Bob and Sally protect the children? First, they might set up a trust for each child under their wills. Each trust keeps the money separate, and prevents any effort to blend it. If the inheritance is in excess of $400,000 per child, then the trust can also save tax money for the child. That is done through an income-splitting strategy that allows the income generated on the inheritance to be taxed at lower rates. If Samantha's inheritance is held in the right trust, she can marry and divorce as often as Elizabeth Taylor and not lose a penny to her departing spouses.

If the trust is not used, Samantha will inherit cash and assets directly. The task then becomes to educate Samantha and her siblings. Some parents use a memo that is drafted and signed in advance. It is given to the children when the parents are dead. Until then, it is stored alongside the wills. It is confidential and addressed to the children. It tells them to go to a lawyer and ask for a one-hour education on what will put the money at risk and what will keep it safe. The idea is to arm the children with knowledge. If they know the rules, they can make decisions with their eyes wide open. That may be all of the protection they need.

The rules at play here are the same whether the children are legally married or common-law for three years and whether the relationship is same sex or opposite sex.

The rules change from province to province. If each child lives in a different province, there will be different rules applicable to each at breakup. Thankfully, the rules are similar from place to place. With a few tweaks, and a bit of knowledge of how the system works, one solution can be sculpted to fit all three children.

Bob and Sally are not real. Their situation is. This story blends the circumstances of literally hundreds of clients who have approached us for help on this point as part of their estate planning.

John E. S. Poyser is a lawyer with the Wealth and Estate Law Group. Contact him at 947-6801 or

Republished from the Winnipeg Free Press print edition March 16, 2011 B7

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