Skip to main content

How to ‘divorce-proof’ your child’s inheritance

If you’re the parent of adult children and plan to leave them an inheritance, you might worry about what would happen to that money if they were to be in a marriage or partnership that broke up.

In most jurisdictions across Canada, assets received by a grown child — whether as an inheritance or as gifts during your lifetime — can be exempt from the division of their family assets in the event of a relationship breakdown.

But if certain planning strategies aren’t implemented, any gift or inheritance you intend for your child could be split with their ex-partner, should their relationship end. This means that a portion of the assets you intended to benefit your child could instead be awarded to their former spouse or partner.

Here’s an overview of five strategies that can help protect the inheritance you pass on to your children from the consequences of a relationship breakdown.

1. Set out your intentions in your will

One easy-to-implement strategy is to make sure your intentions for any inheritance or gift you will give to your adult children are clearly specified in your will.

For example, include a clause that states that your child’s inheritance, when you die, is meant solely for their benefit and is not to be included in any division of their family assets. Also specify that in addition to any principal inherited by your child, any income or growth on the inherited property is also to remain separate.

2. Discuss your wishes with your adult children

Make sure you have an open and frank discussion with your adult children about your intentions for any gifts or inheritances you provide to them. Talk to them about how gifted and inherited funds can be protected from division in the event of a future relationship breakdown.

While it’s important to make sure your wishes are known, this won’t be enough. Other strategies will likely be needed to protect your children’s inheritance from the consequences of relationship breakdown.

3. Advise them to keep inherited assets separate (where applicable)

In some jurisdictions, inherited and/or gifted funds will not be considered part of your child’s family assets if those funds have been kept separate and apart from the rest of any family assets, and those funds still exist at the date of separation. This would require a certain attentiveness on your child’s part: if the gifted or inherited assets were inadvertently mixed with family assets, they would become subject to division.

4. Encourage your children to create domestic contracts

Many couples put in place domestic contracts that govern how assets are divided in the event the relationship ends.

Although these forms of contract go by many different names —pre-nuptial agreement (pre-nup), post-nup (or marriage contract), co-habitation agreement — they are all forms of domestic contracts setting out the rights and responsibilities of two people living in a conjugal relationship.

In this case, a parent’s role would generally be limited to discussing the options with an adult child. The domestic contract would be entered into by the two participants in the relationship, whether it’s a legal marriage or a common-law partnership.

5. Consider leaving assets to your children in long-term trusts

A fifth strategy, and one that is within your control as a parent, involves using long-term testamentary trusts in the distribution of your estate to your adult children. A testamentary trust is a legal entity, established in a will, that manages the assets of the deceased on behalf of the trust beneficiaries.

If the beneficiary of a testamentary trust chooses to keep the assets in the trust and does not use them to purchase family assets (such as a family home), the assets are not generally subject to division in the event of relationship breakdown.

Long-term trusts are a flexible financial planning tool that offer other benefits, too. For example, trusts can be a good way to flow funds to any future grandchildren, providing tax advantages to the beneficiaries, as well as limits on how and when the money is available to them.

All this said, if you’re thinking about using testamentary trusts to pass your assets on to your children (or grandchildren), be aware that there are several tax issues you’ll need to include in your planning.

Understand the rules and plan ahead

The rules around inherited/gifted money in the event of a relationship breakdown can be complex, and they’re different depending on whether your child is in a legal marriage or a common-law partnership, and which province or territory they’re living in.

As a parent, it’s worth taking the time to make sure you understand the rules and familiarize yourself with the strategies that can help ensure your wishes are fulfilled. As you plan, an MD Advisor* can be an important part of your team.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

Estate and trust services are offered through MD Private Trust Company.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.