High net worth spouses and divorce – The Lawyer’s Daily

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

This article covers some of the legal issues facing families that enjoy a high net worth. More specifically, how gifts and inheritances are treated in separation or divorce, what happens to funds gifted to the children by grandparents, and how the couple can manage working with a number of advisers.

How are gifts and inheritances dealt with in a separation?

In Ontario, the distribution of gifts and inheritances on a separation or divorce depends on whether the couple was married or living common law.

Married couples

Married couples equally divide the assets that they have each accumulated during the marriage, whether the asset is in one person’s name or in both names, as provided in the Family Law Act.

However, assets received by gifts or inheritance during the marriage are excluded and do not need to be shared with the separating spouse. Assets that were received by gift or inheritance before the marriage are treated the same way as other pre-marriage assets, such that the growth in the value during the marriage is shared.

An important exception is that if a gift is applied towards the couple’s matrimonial home, either before or during the marriage, there is no exemption and the entire value of the gift is shared. There can be more than one matrimonial home; a cottage is usually found to be a matrimonial home.

Unmarried (common law) couples

In Ontario, the division of assets is based on ownership and there is no law giving couples the right to equalize the assets accumulated during their relationship.

If this results in an unfair situation — for example, if a spouse made significant contributions to the maintenance or increase in value of the assets of the other — they have to resort to equitable principles, namely “unjust enrichment,” to address their claims of inequitable distribution of assets upon the breakdown of the relationship.

Since an important decision of the Supreme Court of Canada in 2011, Kerr v. Baranow [2011] 1 S.C.R. 269, unmarried spouses can now resort to the concept of “joint family venture.” To be able to establish that there was unjust enrichment arising from a joint family venture, the person who is not on the title must demonstrate that a joint family venture existed and that there is a link between that person’s contribution to the joint family venture and the accumulation of wealth or assets. 

It would be fairly difficult for the non-owner spouse to establish a trust interest in assets that were gifted to the other spouse considering that they did nothing to participate in the acquisition of this asset.

Bank accounts that grandparents fund for the kids

Grandparents frequently set up bank accounts for the benefit of their grandchildren. If a bank account was set up in trust for a child, the child becomes entitled to the funds at the age of majority unless other trust provisions are in place that delay the transfer to the child.

If the grandparents funded an RESP that is in the name of their son or daughter for the benefit of their grandchild, according to tax laws, the RESP belongs to the person in whose name it is, so the son or daughter. Upon a separation of the son or daughter, the owner of the RESP, can (1) list the RESP as an asset of the separating spouse and divide it according to the family laws (if they are married, the funds would be equalized along with the other assets) and manage and use the funds in the RESP as that person chooses, (2) commit to holding the RESP in trust for the other spouse and to use the funds for the children’s post-secondary education, or (3) add the name of the other spouse on the account to ensure the right of survivorship and to give the other spouse equal say in how to use the RESP.

The parents are responsible for some or all of the costs of their children’s post-secondary education (at least a first degree, but this is a complicated area of the law and outside the scope of this article). However, if the child will become entitled to a significant amount of money from their grandparents, it is customary for the separating couple to discuss and come to agreement on how much a child should contribute to these education costs.

How to manage the various advisers

Separating spouses likely have financially intertwined portfolios and several advisers, each having a different angle or motivation. Untangling the family affairs can be done in tax advantageous ways if the separating couple works collaboratively towards a common goal.

Separating spouses will gain by communicating their goals and interests for the separation process and for the outcome of the process to their advisers.

It is sometimes necessary for advisers to initiate communications with other advisers to reach alignment on what actions need to be taken and what advice is given to their respective client. Too often clients hear conflicting advice, which adds confusion and stress.

A well-managed collaborative process can provide faster results and privacy. Financial statements and the agreement reached by the couple remain private in non-court processes.

Conclusion

Working collaboratively, and out of court, will benefit not just the separating spouses, but the entire family system.

Nathalie Boutet of Boutet Family Law & Mediation is an experienced family law lawyer, accredited mediator and certified family enterprise adviser, skilled at providing unique strategies and out-of-court results to the complex legal, financial and human matters related to separation or divorce for high-net-worth families and business owners. Contact Boutet by email.

The opinions expressed are those of the author and do not reflect the views of the author’s firm, its clients, The Lawyer’s Daily, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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