Family Law Implications of Intergenerational Wealth Transfers

High rates of separation require the proactive review of family law implications of wealth transfers

With increased cost of living, high interest rates, inflation and a housing market that is increasingly inaccessible to buyers, intergenerational wealth transfers are on the rise.

While inheritances are commonly used to facilitate intergenerational wealth transfers, we are increasingly seeing inter vivos gifts, loans, income subsidization through allowances and income generating gifts, children being added as shareholders to family businesses and as beneficiaries of trusts, the transfer of property to children, and estate freezes. 

While the facilitation of wealth transfers is commonplace for wealth advisors and lawyers across a variety of specializations—including tax, real estate, trust and estates, and corporate—the family law implications of these transfers are often not considered until a family law dispute arises. High rates of separation necessitate that the family law implications of wealth transfers be reviewed proactively, both upfront and on an ongoing basis as the family status of recipients change and mature.

As we operate within the lanes of our professional and legal specialties, there are often gaps in planning, coverage and protection as they relate to the family law implications of wealth transfers that can ultimately serve to significantly undermine the maintenance and protection of intergenerational wealth. This is especially true where the type and timing of wealth transfers impact property and support obligations and entitlements in the event of a separation of spouses.

Property Rights and Equalization of Net Family Property

Married spouses calculate their respective net family property ("NFP") to determine the value of any equalization payment owing as between them. Included in the calculation of net family property are a party's assets and liabilities, including but not limited to real property, accounts, investments, cash surrender values of life insurance policies, business interests, money owed to a party, trust interests, debts and inter-family loans.

Parties are entitled to a date of marriage deduction whereby they deduct their net worth on the date of marriage from their net worth on the date of separation. Exceptions to date of marriage deductions include matrimonial homes (of which there can be more than one) where the same home is owned on date of marriage and date of separation.

In addition to deductions, there are exclusions applicable to the calculation of a party's net family property, which can include, for example, gifts, inheritances, life insurance proceeds and income earned and maintained from excluded assets. For property to be validly excluded, it must have been received during the marriage, and exist, in whole or in part, on the date of separation in a valid and traceable form. For example, where funds are spent to maintain lifestyle or invested into a matrimonial home, they lose their ability to be excluded from the calculation of net family property.

An equalization payment is determined by calculating the difference between parties' respective NFP, and then dividing this difference in half. The result of this calculation is that each party exits the marriage with equal NFP values (i.e., Spouse A NFP: $300 - Spouse B NFP: $100 = $200 / 2 = $100 to Spouse B, leaving both Spouse A and B with $200).

While common law spouses in Ontario do not have property rights in the event of a separation, trust claims are commonly asserted against property holdings of common law spouses. It is not uncommon for trust claims to also be asserted by married spouses against property that is solely owned by the other.

Once an equalization payment has been determined, parties then need to establish how the payment will be facilitated. It is not uncommon that assets need to be sold to facilitate an equalization payment, or that assets are transferred between parties to facilitate these payments, in part or whole, through negotiated settlements.

Child and Spousal Support

Assuming entitlement to support exists, determination of the quantum of support payable starts with calculating parties' income for support purposes. Determining income for support purposes is not limited to income reported to the Canada Revenue Agency. This exercise involves looking at income from all sources, including but not limited to: gifts (depending on a variety of factors like quantum, frequency and impact on lifestyle), trust dispositions, retrained earnings, and pre-tax corporate income and improperly deducted business expenses.

There are instances where tax planning advice may result in imputation of income to parties, particularly where income is earned by way of dividends or capital gains. Preferential tax treatment on income earned will likely result in the imputation of income to a party, commonly done by grossing up these amounts to reflect an after tax benefit equivalent to the average marginal tax rate for employment income.

Additionally, the underuse of property holdings to generate income and retained corporate earnings, may also result in income imputation or income adjustments to reflect income that is available, but underutilized. This can often lead to surprises for payors and recipients of support where their income for support purposes in a family law context far exceeds their understanding of their actual income.

Considerations for professionals and lawyers facilitating wealth transfers

Important questions to consider in your work with respect to possible family law implications, include, but are not limited to:

  1. What is the intention of the transferring party with respect to the long-term maintenance and protection of these funds?
  2. What is the relationship status of the recipient of these funds - single, common law, married, separated, separated with an ongoing support obligation, married with an ongoing support obligation to a first family?
  3. What are the short- and long-term plans with respect to the assets at issue?
  4. What would the risk to my client be if this property was sold or liquidated to facilitate an equalization payment?
  5. Is there an income diversion or preferential tax treatment that could ultimately be allocated back to the recipient that may impact income for support purposes?
  6. Who are the intended versus possible ultimate beneficiaries of the assets at issue?

Understanding and considering the relationship status of parties receiving transfers is the logical starting point when inquiring about family law exposure. However, whether or not an intended recipient has a spouse or support obligation at the time of a transfer, clients should still be advised of the future risks that could arise as relationship statuses change.

Family Law Safeguards and Protections

It is commonly recommended that domestic agreements, like cohabitation agreements and marriage contracts, be utilized to off-set the risk of dissipation of intergenerational wealth transfer. Domestic agreements can address a variety of family law issues, including but not limited to: the exclusion of property, trust interest and corporate interests from the calculation of net family property; the protection of assets from being sold or enforced against to facilitate the payment of equalization payments; waiving and restricting trust claims to property; addressing date of marriage deductions of matrimonial homes; protecting inter-family loans and gifts; and addressing spousal support obligations with the calculation of income for support purposes.

If the parties are not willing to enter into a domestic agreement, then the form, structure and documentation of a wealth transfer must be prepared with family law implications in mind. The recipient will need advice and guidance as to how the courts regard these transfers (for example: gifts and loans), and the related potential family law implications.

Ultimately, educating all parties to wealth transfers on the possible present and future family law implications allows for more meaningful engagement and decision making through the client service lifecycle. While often considered one-time transactions, the implication of wealth transfers are not static in a family law context.

As a full-service law firm, Torkin Manes is uniquely situated to  provide comprehensive advice that includes a family law protection with respect to intergenerational wealth transfers.


Sarah Boyle is a partner in the Family Law Group at Torkin Manes LLP, where she has built a robust practice providing legal counsel on all areas of family law, including the full spectrum of issues arising from separation, marriage and cohabitation agreements. Her discretion, sophistication and skill ideally position her to manage high-net-worth matters. Clients turn to her to manage complex parenting, property and support issues, as well as intergenerational wealth transfers and interjurisdictional matters.



Sarah Boyle