Saturday, November 19, 2011

Inheritances and the New Family Law Act

On November 14, 2011, the Government of British Columbia introduced Bill 16, the Family Law Act, into the Legislative Assembly. The new Act, if passed, and brought into force, will make significant changes to family law in British Columbia. J.P. Boyd has written a nice summary of the Family Law Act for the Stream, Courthouse Libraries B.C. Blog, which you may read here.

I am going to focus a few posts on those aspects of the Family Law Act that will affect my practice areas of estate planning and administration and incapacity planning.

My clients sometimes express concerns about what will happen to property they give or leave to their children or other beneficiaries on the breakdown of a beneficiary’s marriage.

The basic structure of the Family Law Act is that when a married couple or common-law couple (which is defined in the legislation) separate, each has an undivided half interest in the “family property.” Section 84 sets out a broad and inclusive definition of family property, while section 85 excludes some categories of property. Significantly, section 85 (1) (b) excludes “gifts or inheritances to a spouse.”

Problem solved, right? It’s more complicated than that.

Section 84 (2) (g) includes in family property:

the amount by which the value of excluded property has increased since the later of the date
(i) the relationship between the spouses began, or
(ii) the excluded property was acquired.

To illustrate how I expect this will operate, suppose you give your married daughter $200,000 (or she inherits that amount on your death while she is married). She invests the funds in mutual funds. She and her husband separate. On the date of separation, the value of the mutual funds has grown to $400,000. The $200,000 she received from you is excluded, but the $200,000 of growth is divided equally between your daughter and her former husband. She is entitled to $300,000, and he, $100,000.

In this illustration, I have assumed an outright gift. I will talk about trusts in a later post.

I should note that although the basic rule in the Family Law Act will be that family property is divided equally, the court may order an unequal division if it is “significantly unfair” to order equal division. The parties may also make an agreement providing for an unequal division on the breakdown of their marriage or common law relationship.

Although excluded property is normally excluded, the court may order a division of excluded property in some circumstances. Section 96 provides:

The Supreme Court must not order a division of excluded property unless
(a) family property or family debt located outside British Columbia cannot practically be divided, or
(b) it would be significantly unfair not to divide excluded property on consideration of
(i) the duration of the relationship between the spouses, and
(ii) a spouse's direct contribution to the preservation, maintenance, improvement, operation or management of excluded property

Overall, I think the treatment of gifts and inheritances in the Family Law Act will be better than under the current legislation, which includes gifts and inheritances that are used for a “family purpose” as “family assets,” to be divided between the spouses, but then gives the court discretion to order an unequal division having regard to the fact that the property was acquired through inheritance or gift. The new Family Law Act may bring greater certainty to how gifts and inheritances are treated, but until it is passed, brought into effect, and the courts have interpreted it, we really won’t know.


Anonymous said...

The New BC Family Law Act will be construed (after case law across Canada is examined in a trial) that the "matrimonial home" must be split 50/50 despite who owned it prior to a common law marriage.
The legislation is also illegal in that it provides cohabiting Canadians the government sanction, consent, contract and protections of a conjugal union, despite the fact that one or both "common law marriage partners" remain married (not divorced) from their first legal spouse(s). S.293 of the Criminal code says it is illegal for an authority to provide this type of consent to multiple conjugal relationships. Common law marriages have been described by governments for 50 years as conjugal relationships as has civil marriage.

Stan Rule said...

Each province has its own legislation governing the division of property. Although B.C. Courts may and do consider principles in court decisions in other provinces, the Courts look at the wording of the legislation. I would be surprised if the Courts in B.C. will construe the new legislation as always requiring a 50/50 division of the matrimonial home.

The second part of your comment, that the new legislation is illegal, is just plain wrong.

Anonymous said...

Thank you Stan for the post. I have a question, what would happen to division of the matrimonial home if some of its mortgage was paid by an inheritance money received by a spouse during the course of cohabitation? I mean after separation, would it be divided 50/50 as the inheritance was used to pay off some of the family debt, or the inheritance amount would be excluded from the division of family property?