This week’s blog has been written by Darren Lund

Estate planning and family law intersect in numerous ways. One of the most obvious intersections between these two areas of law is the so-called “family law clause” that appears in Ontario wills, deeds of gift, and inter vivos trusts. Although the clause is ubiquitous, it is one that is easily misunderstood by lay readers of wills, deeds of gift, and trusts.

The typical family law clause is usually some variation on the example below:

I direct that any succession, legacy, gift or inheritance to which any person is or shall become entitled in accordance with the provisions of this Will, or any property substituted therefor (“Substituted Property”), any income at any time subsequently derived from such succession, legacy, gift, inheritance or Substituted Property, any increase or accretion in value to such succession, legacy, gift, inheritance or Substituted Property; and any property into which any of the foregoing property can be traced, shall be excluded from such person’s net family property, as such term is defined in the Family Law Act…and shall remain the separate property of such person…This is an express statement within the meaning of sub-section 4(2)2 of the Family Law Act.[1]

The clause appears to be relatively straightforward on its face. It expresses an intention by the will-maker that any gifts provided to a beneficiary under the will are intended to be excluded from the beneficiary’s net family property for purposes of equalization under the Ontario Family Law Act. Indeed, that is what the plain meaning of the words seem to say, and it is a question I am commonly asked by clients when reviewing their draft wills with them. However, it is important to appreciate the statutory context for family law clauses so that both their benefits and, importantly, their limitations, are understood.

In Ontario’s matrimonial property system, which is an “equalization” system, the value of certain types of property, called “excluded property”, is excluded from the net worth of the spouse who owns the property. One of the most common categories of excluded property is a gift or inheritance, other than a matrimonial home, that is received by a spouse during the marriage. For example, if a person receives a cash inheritance while that person is married, the value of the inheritance that is owned at the time of a separation is excluded property, assuming the inheritance is identifiable and has not, for example, been comingled with property that is not excluded property, put into joint ownership with another person, or used to acquire a matrimonial home.

As can be seen, the timing of a gift or inheritance is important. If a gift or inheritance is received while a person is not married (including if a person is in a common law relationship), the gift or inheritance is not excluded property. If the person who has received the gift or inheritance later marries, the value of the inheritance owned on the date of marriage forms part of their net worth on the date of marriage like any other asset, and the growth in value of that property during the course of the marriage is included in the equalization calculation should the person and their married spouse later separate.

Since the status of a gift or inheritance as excluded property depends on whether the beneficiary was married at the time the gift or inheritance vests, it is a reasonable question to ask why the family law clause set out above is needed. The key to the answer is in the language that is first underlined in the above example.

Under the Ontario Family Law Act, the property that is gifted or received as an inheritance by a married spouse, any substitute or traced property (other than a matrimonial home), and any increase in value of the property is excluded property by statute, to the extent it is owned by the spouse at the time of separation. However, income from that property is only excluded to the extent the donor or will-maker has expressly stated that the income is excluded. Therefore, the purpose of the family law clause in wills, deeds of gift, and inter vivos trusts, is to expressly state that the income from the gift or inheritance is also intended to be excluded property. This is very important, since the income earned on the gift or inheritance may be significant, particularly if the gift or inheritance has been invested for a number of years prior to a separation.

The common misconception about family law clauses is that the clause, in itself, is sufficient to make a gift or inheritance excluded property in all cases, even if the person who receives the gift or inheritance is unmarried at that time the gift or inheritance vests. Unless the law of Ontario changes a gift or inheritance received before marriage is not excluded property, unless the spouses enter into a marriage contract to exclude the pre-marriage gift or inheritance. Rather, the purpose of the clause is to extend the breadth of the exclusion for a gift or inheritance received during marriage to include the income derived from the gift or inheritance.

[1]      Family law clauses may also make reference to family property systems in other jurisdictions such as community of property or partnership of acquests, but for purposes of this blog I am focusing on Ontario’s “equalization” system for matrimonial property.