Inheritance - 2 questions

[in_time]

Hi All,
This isn't a place I'd ever imagined I'd be... but such is life. Anyway I am pretty sure I'm headed for a permanent split with my wife. There are a couple questions I have regarding an inheritance I received during our marriage.
1. I understand that an inheritance is not included when equalizing/splitting assets. I kept it in a separate investment account. However, I did a prescribed rate spousal loan to her for tax purposes 2 years ago (all documented). I have since called back the loan, prior to us separating because I was worried she might start tapping into the capital (I can't imagine she would do such a thing... but she's surely not the person I used to know either). Does the spousal loan put this inheritance at risk of being claimed as communal property? Im not thinking she would make such a claim, but shes running with a bunch of gal pals that might push her this way.

2. Once we have calculated our asset split and equalization, the next step is to negotiate how that equalization is made up of (ie some $ from pension, some from home equity, some from RRSP etc). I will be the one to anti up. Is my inheritance on the table during this discussion? I think it is enough that it could tip the balance of certain options... if I wanted to buy out the mat home... I could put it in the pot as part of the settlement. But in general, are you expected to utilize all your assets, like inheritance to come to a fair agreement?

thanks!

[Once.is.enough]

No it would not be included in equalization. It was not commingled. The loan is an investment regardless of to whom it was made. She may argue differently but I don't think she would be successful. This advice is predicated on the information that you supplied regarding the documentation of the loan. If the loan has not been repaid she can use this as a debit in her equalization paperwork. The capital gain on the investment should be included as a credit on your sheet but not the principle. You could argue that it should not be included but I don't think you would be successful.

Then again I'm just some idiot on the internet.

[in_time]

Thank you Once.is.enough! I never thought of it in those terms.... but yes, that makes sense. It was an loan that I received interest on.... so that is a direct investment.
Hindsight is 20/20 of course. I would have had some nice capital gains that would have been isolated... now on her side of the assets. (I did get a bit back when we used the cap gains on her account to do TFSA contribs for both of us). And technically I will regain some of that in equalization process.

[arabian]

Money from inheritance (you received DURING your marriage) did in fact drizzle or mingle into your wife or joint finances by way of loan.

It might come down to the definition of "co-mingle" and what the mingled amount was used for.

What was the money used for?

[shirley1011]

any interest earned from inheritance must be split

[Rioe]

The inheritance should be off the table when it comes to equalization, since you kept it in a separate account. Whatever remains in that account is excluded. Whatever you took out and used on the family, ie, the loan, is now matrimonial property and subject to equalization.

For equalization, if you determine that you owe her money, you can get that money however you like. You can give her your half of the matrimonial home, you can split your pension, you can give her a cash payout, whatever combination works for you to make the math add up right. Some people have to take out a loan. You have an inheritance you can draw from instead. Just because it is the source of funds does not stop it from staying an excluded part of the equalization process.

[in_time]

I loaned her the money (as a prescribed rate spousal loan @1%). Those funds were in an investment account in her name. the goal being any capital gains and income would be taxed at her (lower) rate. So for the first two years, we save a few thousand in income tax payable to rev can. She has realized about $40,000 in profit in the account. Some of these profits did co-mingle (used for contribs to both our TFSAs and a contrib to her own RRSP). About 20k remains.

In terms of settlement... I was just thinking I should not immediately discuss the inheritance $$ initially... but bring it in as a negotiating tactic once I know what her intent is. It might be a good lever to tip a proposal I favor (ie buying out the mat home). Not sure at this point what works best.

I am really hoping that none of this is necessary, that we mostly agree on most things... and we ride off into the sunset (on separate horses in separate directions of course).

[Rioe]

I loaned her the money (as a prescribed rate spousal loan @1%). Those funds were in an investment account in her name. the goal being any capital gains and income would be taxed at her (lower) rate. So for the first two years, we save a few thousand in income tax payable to rev can. She has realized about $40,000 in profit in the account. Some of these profits did co-mingle (used for contribs to both our TFSAs and a contrib to her own RRSP). About 20k remains.

The money that went from your inheritance to her became matrimonial money, and is still half yours, no matter whose name is on the accounts, who claimed it on income tax and where the money went, including the profit. The only money which is excluded from equalization is the amount remaining in your inheritance account.

If any money got repaid back into the inheritance account, that might be iffy. I'm not sure if you can un-co-mingle funds. Depends on your documentation and how hard you want to fight. The amount may not be worth fighting over.

[in_time]

Hi Rioe,
Just to clarify... at date of separation, the loan was closed and the principal of the loan was back in my inheritance account in my name (she still had the profit generated from the investments remaining).

[ottawa_divorce_dad]

Since the loan from the inheritance account was repaid on the date of separation, my expectation would be that it would not be part of equalization. Inheritance funds appear to have been keps separate from matrimonial finances and the clearest example of that is the fact that the loan was repaid and the inheritance account replenished on the date of separation.

I would list the inheritance account balances on the date of separation as "excluded property" which will therefore never be part of equalization. No need to use it as a negotiation tactic imo.

[stripes]

The money that went from your inheritance to her became matrimonial money, and is still half yours, no matter whose name is on the accounts, who claimed it on income tax and where the money went, including the profit. The only money which is excluded from equalization is the amount remaining in your inheritance account.

If any money got repaid back into the inheritance account, that might be iffy. I'm not sure if you can un-co-mingle funds. Depends on your documentation and how hard you want to fight. The amount may not be worth fighting over.

^^^ I'm not an accountant, but ... yup. I think the money you lent to her becomes part of the matrimonial property, because it became part of your finances as a couple when it moved from your account to hers. It's the same as if you had used part of your inheritance to pay for repairs to the roof - you can't now pull that amount of money back and claim that it's yours. (The 1% interest that you charged her would also be part of the matrimonial property, as a shared asset, I believe).

Do the math - what would the complete matrimonial property look like with the loan included (the amount of the loan is shared property), and with the loan excluded (the amount of the loan is entirely yours)? Unless the difference is on the order of tens of thousands of dollars, it's probably simpler and cheaper to just accept that the value of the loan has become part of your joint finances, and do the equalization on that basis, rather than drag out hours of lawyer time over this.

Alternately, if there's some other issue that you're negotiating over, you could use the inclusion of the loan in marital property as a negotiating card - if she agrees to let you keep the boat (or whatever), you'll agree not to exclude the loan from the marital property. Her lawyer might call your bluff, of course.

[Rioe]

Hi Rioe,
Just to clarify... at date of separation, the loan was closed and the principal of the loan was back in my inheritance account in my name (she still had the profit generated from the investments remaining).

Do you mean that a while prior to separation happening, the money was repaid back into the inheritance? Or do you mean that because you were separating, you insisted on the loan money being repaid?

In the first instance, you're in the clear. The whole inheritance, plus the 1% interest, is excluded property and does not get divided.

In the second, I'm not so sure. Your ex could maybe have an argument that it was marital money and you just yanked it away because you were planning on leaving her. Kind of like the situation where someone deliberately runs up the credit cards prior to separation, or empties the bank accounts.

What is your ex arguing should happen?

[in_time]

It is the first scenario. The loan was repaid and the principal I loaned her from my inheritance account was back under my name (plus interest).

Anyway, at this time I do not know her intentions.... we have not yet "lawyered up". I am trying to get ahead of the game so to speak. I am hoping we can do a collaborative process on the split and this will not become an issue to argue over. I hope she has the decency to respect this money was left to me exclusively by my parents.

I will post an update as it progresses.

[stripes]

It is the first scenario. The loan was repaid and the principal I loaned her from my inheritance account was back under my name (plus interest).

Anyway, at this time I do not know her intentions.... we have not yet "lawyered up". I am trying to get ahead of the game so to speak. I am hoping we can do a collaborative process on the split and this will not become an issue to argue over. I hope she has the decency to respect this money was left to me exclusively by my parents.

I will post an update as it progresses.

So you lent money to your ex and charged her interest on it, and now you claim both the amount of the loan and the interest your ex paid are excluded from marital property? I think you might want to see a financial expert about this one. I think your ex might have a good case to argue that by "investing" the money in her, you were no longer keeping it separate and apart from the marital finances, just as if you had chosen to invest it instead in spousal RRSP or any other form of joint investment.

The fact that you were charging her interest and profiting off her use of your inheritance sounds like a complicating factor.

I strongly recommend getting some expert advice on this one before you start the lawyering - don't assume that it would be "indecent" of your wife to not "respect" your inheritance, when she may in fact have a legitimate claim to a portion of the inheritance which was mingled with your joint finances in the course of her investing.

[Once.is.enough]

His money his investment. Not commingled in my opinion. But there are greasy women out there who will argue anything to steal a buck rather then earning it. There is a line up lawyers to encourage and profit from this. Good luck