When explaining the purpose of various clauses in clients’ Wills with them, one clause that always seems to peak clients’ interest is the “Community of Property” clause. Essentially, this clause can help protect a beneficiary’s property from ending up in the hands of that beneficiary’s ex-spouse.
This is understandably an important consideration for many clients and something clients often ask about early on in the estate planning process. While the below applies to any beneficiary under a Will, most of the time this concern for clients relates to them wanting to know how they can make sure the inheritance, or any part thereof that they leave to their child, does not end up with an ex-son-in-law or daughter-in-law should their child end up getting a divorce.
Community of Property Clauses
The “Community of Property” clause in any given Will looks something like this:
“All property acquired by any beneficiary under my Will, including any income or capital distributed to such beneficiary together with any property into which such property can be traced, and all income from such property or properties into which such property can be traced, shall be excluded from such beneficiary’s net family property for the purposes of the Ontario Family Law Act, or similar legislation, and shall not be subject to claims of ownership or division by such beneficiary’s spouse or partner pursuant to legislation of any jurisdiction, it being my intention that all such property and any income therefrom shall remain the separate property of the named beneficiary free of any claim from his or her spouse or partner. “Income” as used in this paragraph shall include all capital gains from such property and any property into which it can be traced.”
Net Family Property
A spouse’s net family property is the value of his or her property at the date of separation, after deducting (1) debts and other liabilities and (2) the value of property owned by the spouse when he or she entered into the marriage (except a matrimonial home). Essentially, any property that does form part of a spouse’s net family property will be subject to the calculation of how property will be divided between the spouses upon a marital breakdown.
Section 4(2) of the Family Law Act provides that certain types of property will be excluded from the calculation of what forms part of his or her net family property. The following property is among the types of property that will be excluded from a spouse’s net family property:
(a) property, other than a matrimonial home, that was acquired by gift or inheritance from a third person after the date of marriage; and
(b) income from property referred to in (a) above, if the donor or testator has expressly stated that it is to be excluded from the spouse’s net family property.
Accordingly, including the “Community of Property” clause in one’s Will represents that testator’s express statement that not only the inheritance left to a beneficiary, but also the income from that inheritance, shall not form part of that beneficiary’s net family property, and ultimately, the calculation of what that beneficiary will essentially have to share with his or her ex-spouse upon marital breakdown.
It is important that clients understand that these provisions of the Family Law Act and including the Community of Property clause in one’s Will is still not an absolute protection against a beneficiary’s inheritance being subject to division with his or her ex-spouse. That beneficiary must also do some of his or her own due diligence to protect his or her inheritance.
For example, if a beneficiary chooses to use his or her inheritance on renovating the matrimonial home shared with his or her spouse, the inheritance may lose some of its otherwise “protected” status as excluded property. While property may be able to be “traced” to show that it originated from an inheritance and should therefore still be excluded from a beneficiary’s net family property, once an inheritance has been co-mingled with matrimonial property the protection it otherwise has under the law from forming part of one’s net family property is compromised.
Tracing is a complicated exercise, as is calculating one’s net family property. If a beneficiary really wants to protect his or her property from forming part of his or her net family property, he or she should keep it separate and apart from property shared with his or her spouse, including joint bank accounts, and especially the matrimonial home.
As may be noted from the above-mentioned references to the matrimonial home, this property has a special status under the law. Among other things, pursuant to sub-paragraph (a) above, a matrimonial home that is acquired as a gift or inheritance is not excluded from one’s net family property. This means that clients should also think twice about the form in which they leave an inheritance to their child. If they specifically leave that child real property, and that child chooses to use that real property as his or her matrimonial home, that real property will not be excluded from the beneficiary’s net family property should his or her marriage breakdown.
Accordingly, while the Family Law Act and the “Community of Property” clause provide some protection from a beneficiary’s inheritance (and the income on that inheritance) from forming part of his or her net family property, there is still an onus on that beneficiary to protect his or her absolute entitlement to his or her inheritance by keeping that inheritance separate and apart from property shared with his or her spouse. Clients should talk to their children (or grandchildren, etc. as the case may be) to express their wishes that they keep their inheritance separate and apart from shared matrimonial property if this is something that is important to them (which, as mentioned, it usually is).