Inheritance and Gifts During Marriage in a BC Divorce

You received an inheritance during your marriage. Now you're separating. Is that money protected, or does your spouse get half? The answer depends on what you did with it after receiving it — and whether you can prove the paper trail.

The Basic Rule: Inheritances and Gifts Are Excluded Property

Under Section 85 of the BC Family Law Act, the following are excluded from the 50/50 division:

• Property received by one spouse as an inheritance from a third party
• Property received by one spouse as a gift from a third party
• Personal injury settlements and insurance proceeds

This means your inheritance is yours alone — your spouse has no automatic claim to it. The same applies to gifts from your parents, grandparents, or other family members.

But there's a critical qualifier: only the original value is excluded. Any increase in the value of that inheritance during the relationship is family property and must be divided equally.

The Growth Problem: Excluded Value vs. Family Property

Say you inherited $100,000 and invested it. By separation, it's worth $180,000. Here's how the FLA handles it:

• Excluded property: $100,000 (original inheritance value)
• Family property: $80,000 (increase in value during relationship) — split 50/50

Your spouse gets $40,000 of the growth. You keep the original $100,000 plus your half of the growth ($40,000), totaling $140,000.

This applies regardless of where the inheritance is held — in a bank account, investment portfolio, real estate, or anywhere else. The growth during the relationship is always shared.

Commingling: When Excluded Property Loses Its Status

Excluded property retains its status only if it can be traced — meaning you can demonstrate an unbroken chain from the original asset to its current form. Commingling happens when excluded funds are mixed with family funds in ways that make tracing impossible.

Examples of commingling that can destroy exclusions:

• Depositing inheritance into a joint chequing account used for household expenses
• Using inheritance money to pay for vacations, renovations, or daily living costs (consumables)
• Mixing inherited funds with employment income in the same account without maintaining separate tracking
• Using part of an inheritance for family expenses and part for investment without documenting which was which

What doesn't destroy the exclusion (post-Bill 17):

• Putting inherited funds into a jointly-titled property (Section 85(3) now preserves the exclusion)
• Transferring inherited investments into your spouse's name as part of financial planning
• Investing the inheritance alongside other excluded property in a single account

The key insight: spending excluded property on consumables destroys it permanently. Investing or converting it into another form preserves it — but you must be able to trace the conversion.

How Tracing Works in Practice

BC courts use the pro-rata tracing model established in Mills v. Mills. If your excluded funds are mixed with family funds in an investment portfolio, your exclusion isn't all-or-nothing — it's proportional.

Example: You have an investment account with $50,000 from inheritance (excluded) and $50,000 from employment savings (family property). The account grows to $120,000 by separation.

• Your excluded proportion: 50% ($50,000 of the original $100,000)
• Excluded value at separation: 50% × $120,000 = $60,000
• Family property portion: $60,000 — split 50/50

The proportion is calculated based on contributions, not timing. If you contributed the inheritance first and employment savings later, the proportion still uses total contributions.

Documentation You Need

To successfully claim an inheritance exclusion, you need:

1. Proof of inheritance: The will, estate distribution letter, or bank draft from the estate trustee showing funds received
2. Deposit records: Bank statement showing the inheritance arriving in your account
3. Trail of movement: If you transferred the funds to an investment account, TFSA, or property purchase — statements showing each step
4. Separation date value: Current statement showing what the inherited funds are worth today

For gifts, you need similar documentation — a letter from the gift-giver confirming the gift was to you alone (not to both spouses), plus records of how the funds were used.

Protecting Your Inheritance Going Forward

If you're still in a relationship and want to protect future inheritances or gifts:

• Keep inherited funds in a separate account in your name only — never deposit into a joint account
• Don't use inheritance money for household expenses — even temporarily. Once spent on consumables, it's gone.
• Maintain clear records from day one — screenshot or save every statement showing the inherited funds
• Consider a cohabitation or marriage agreement that explicitly confirms the excluded status and addresses future growth

If you've already commingled some inherited funds, start documenting what you can now. Partial tracing is better than no tracing — courts will preserve whatever portion of the exclusion can be demonstrated.

The British Columbia Divorce Financial Split Guide includes dedicated tracing worksheets for inherited property, walking you through the documentation process step by step — from the original inheritance receipt through every conversion to its current form.

The Bottom Line

Inheritances and gifts are protected under BC law — but only if you can prove the trail. The exclusion survives transfers between spouses after Bill 17, but it doesn't survive being spent on consumables. Keep inherited funds separate, document everything, and if you're already in the commingling zone, trace what you can. Partial proof is worth fighting for.

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