Many clients I meet are concerned about protecting, against a claim for division of assets by spouses or future spouses of their children in case of a domestic relationship breakdown, the assets they leave to their children as inheritance.
Generally speaking, in B.C., inheritance is considered excluded property, and is exempt from division of assets, in case of domestic relationship breakdown. However, things become complicated from there. Fortunately, there are certain steps you and your children can take to protect your assets and your children in this regard.
Things You Can Do
Family Meeting ***
When it comes to family dynamics and inheritance, effective communication is crucial. Have a family meeting. Inform your children of your testamentary wishes and intentions. Explain to your children your objective to protect the assets which a lifetime of work, thoughtful planning, and discipline has enabled you to leave them as an inheritance. At this family meeting and subsequent communications, you may wish to educate your children of the options available to them to protect themselves and their inheritance which we will discuss below.
You may state in your will that each child’s inheritance upon your death is provided to that child strictly for the use, enjoyment, and benefit of that child, not to be included in the family property of that child and the child’s spouse.
Long Term, Fully Discretionary Testamentary Trusts
A testamentary trust is a legal structure created in your will where you would name a trusted person, a professional, or a trust company as your trustee (the “Trustee”) who will have the fiduciary duty to manage the assets settled in the trust (the “Trust Assets”) on behalf of and in the best interest of the beneficiaries of the Trust, being your children (the “Beneficiaries”). In a long term fully discretionary trust (the “Trust”), the Beneficiaries will not have any control over the Trust Assets. The Trustee has all the control. The Trustee has a fiduciary duty to use, in the best interest of the Beneficiaries, the Trust Assets in accordance with your instructions expressed in your will. The Beneficiaries do not have a right to instruct the Trustee or influence the Trustee’s decisions. Placing the Trust Assets in a long-term fully discretionary trust, giving the Trustee the control of the Trust Assets, puts the Trust Assets outside the control of the Beneficiaries. This lack of control over the Trust Assets is what protects the Trust Assets from a division of assets in case of relationship breakdown.
Although, the following technique has not been tried in the courts yet, many practitioners of trust law are in agreement that you may be able to include a provision in the Trust suspending payments from the Trust to the Beneficiaries once the Beneficiaries enter a marriage, a marriage like relationship, or a domestic relationship; the payments to the Beneficiaries would then resume and may even increase if having obtained proper legal advice, the Beneficiaries were to enter a domestic agreement with their spouses to exclude the Trust Assets from family property.
Point of Caution: in many cases, trusts have been successfully challenged in the B.C. family law courts. Therefore, to have these testamentary trusts drafted, you must retain an experienced trust lawyer to ensure your trust is structured properly to give you the best chance of protecting your children’s inheritance from claims.
Things Your Children Can Do
i. B.C. Laws
Generally speaking, if the inheritance is not intermingled with family property, under the laws of B.C., the inheritance may be excluded from family property, and therefore exempt from asset division in case of a divorce or separation. However, to be able to use this law, your children must keep diligent records of their inheritance received, kept separate, invested, or used. They must take meticulous care not to intermingle their inheritance with family property.
Point of Caution: Keeping inheritance separate and apart can prove to be difficult to do as usually a person receiving inheritance wishes to apply any inherited funds to improve the life of the person’s family such as paying down, or paying off a mortgage on the family residence; renovating the family residence; buying recreational property for the family; or paying for family vacations; etc. If the inheritance is intermingled in this manner, the inheritance may be subject to division of assets at the time of a relationship breakdown.
A domestic agreement is a contract entered into by two people who live together in a marriage, marriage like, or domestic relationship. In a domestic agreement your children and their spouses can agree on what assets are included and what assets are excluded from the family assets. The excluded assets will be protected and exempt from asset division in case of a domestic relationship breakdown. As discussed above, as most people use inheritances to improve the life of the family unit, signing a domestic agreement may offer the necessary protection.
Author: Manijeh Moieni, J.D.
Senior Estate Planner
** This article is written for educational purposes and does not constitute legal advice. If you are interested in employing any of the above strategies, you must obtain legal advice.
*** For a guide on how to hold an effective family meeting, follow this link:
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