Divorce was the furthest thing from Karen’s mind when she made a rental property bought with inherited money her temporary matrimonial home. That mistake came back to haunt her.
Married, With Children
Karen and Dan had been married, happily or otherwise, for 16 years and had two children when her father died. Other than a temporary 22-month separation, their relationship had been long but financially uneven. She paid the mortgages, taxes, insurance and utilities for their matrimonial homes. He bought groceries, car gas and cigarettes.
Using Inherited Money to Buy a Home
Karen’s father had invested well, but had Alzheimer disease. With his health declining, she borrowed $120,000 against her eventual inheritance. The inheritance money, and profits from the sale of a townhouse the couple jointly owned, were used to buy a new matrimonial home. The couple listed themselves as joint tenants on the property title and, as the years went on, renovated the home together, using Karen’s income.
What Was Left After Probate
Karen’s father died in 2006. Besides the $120,000 she had borrowed, he had left her $362,600 after probate fees and debts. Her father’s will was clear: no part of his estate, either the capital or any income Karen earned from it, should be part of her net family property if her marriage failed.
Where the Inherited Windfall Went
Half a million dollars may seem like a windfall. But as luck would have it, within two years, the money was gone. Furniture, trips with family and friends, shopping, cosmetic dentistry and a boat for Dan, family gifts — it adds up.
Investment Decisions Affect Inheritance Status
But Karen had invested her inheritance wisely. She had used around $239,000 to buy and renovate two rental properties that she kept legal title to and $9,000 to purchase a RESP for their son and spousal RRSP for Dan. It was fortunate she did. With the inheritance gone and a HELOC (home equity line of credit) maxed out, the family was forced to list their matrimonial home for sale in June 2009.
Joint Tenancy Gives Spouse Net Property Claim
Dan had contributed $13,500 to buy their townhouse, their first matrimonial home, and because he was listed as a joint tenant on their second matrimonial home, he owned 50% of it. Altogether, his stake totalled $81,200. So when their matrimonial home sold, Karen paid off $162,400 on one of her rental properties and moved the family there. She changed the legal title to make Dan a joint tenant. As she told Ontario family court, she reasoned that would protect Dan’s financial stake and give the family a place to live until she could sell it and buy a more suitable (affordable) matrimonial home.
Marital Breakdown Leaves Inheritance Vulnerable
Karen had planned the property title change to be temporary. But by October 2009, Dan had lost his job and their marriage was in trouble. Four months later, they separated and Karen moved into the basement. By June 2010, she had left her former rental property altogether. As she said in court, “The thought never crossed my mind that he would try to take half of (the home) or fight me for (it).” With no independent legal advice on her options, she was shocked when she discovered she could be forfeiting her inheritance money.
Spouse Keeps Exclusive Possession
Dan, still unemployed, stayed behind with their teenage sons. He couldn’t afford to live elsewhere and besides, their sons needed a home. Without a court order, he had taken exclusive possession of their new matrimonial home, valued at $261,026 after expenses. Could Karen get it back and reclaim her inheritance?
Inheritances Excluded from Property Division
Normally, Karen’s inheritance would have been excluded from being divided 50/50 with her ex-spouse because her father left it to her alone. Karen’s father had tried to preserve her inheritance by specifying in his will that his estate and any income she made with it should be excluded. Ontario’s Family Law Act allowed him to do that. But making her rental property a matrimonial home had confused the issue.
Keeping Finances Separate to Protect an Inheritance
Keeping accurate records of where inherited money went is central to proving who assets belong to. While inheritances are excluded, that only applies if the money isn’t co-mingled with a couple’s joint bank accounts, assets like matrimonial homes or other investments. Co-mingled money becomes net family property and is divided 50/50.
Appreciation Creates Net Family Property
Karen had spent around $130,000 to buy and renovate the rental property in 2007 and been sole owner until 2009. By the time the couple separated, the home had appreciated substantially. Ontario’s Family Law Act required her to pay Dan 50% of the home’s value ($261,026) or $130,513. The court sided with her that making Dan a joint tenant had only been a temporary convenience and not her long-term intention. Seven long years later, too late to salvage Karen’s inheritance, Dan was finally forced to vacate and Karen had legal title back in her own name.
Draft an Affidavit for Ontario Family Court
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