A major objective of the family law matrimonial property regime is to achieve equal division of “family assets”, between spouses on death or marriage breakdown. Specifically, a spouse’s marriage assets, referred to in family law legislation as his or her “net family property” are calculated as the increase, if any, in his or her net worth between the date of marriage and the valuation date (i.e. death or marriage breakdown) subject to prescribed exclusions of certain categories of assets.
Notably, a real estate interest that a spouse owns prior to marriage and which becomes a matrimonial home after marriage cannot be excluded for purposes of calculating that spouse’s net family property for purposes of equalizing the family assets. In other words, the value of such property is to be divided between the spouses. One should also note that property excluded by statute is not immune from a court order to sell or transfer that property to satisfy an equalization claim.
Where a spouse is entitled to an “equalization” of net family properties and the payer spouse is unable to make the payment, a court may order the payer spouse who is a business owner to pay the other spouse a share of the business profits; or where the business is incorporated, the court may order transfer of shares of the corporation to the other spouse, or cause the corporation to issue shares from treasury to the other spouse.
Thus, this regime presents two potential risks to a succession plan that a business owner may put in place: first, the possibility that his or her spouse will make an equalization claim against him or her (or against his or her estate); and second, the possibility that when the equity of the business is passed to a child, that child`s spouse may make an equalization claim against the child. The matrimonial property rights of a spouse come ahead of those of any of the beneficiaries under a will. Where a business owner has died and the surviving spouse elects in favour of equalization, he or she forfeits all will entitlements unless the will states that the spouse can have the benefits under the will in addition to the equalization payment.
The surest method of protecting against a matrimonial property claim against the business owner is a marriage contract, whether agreed upon and signed before marriage or afterwards. This contract can be drafted to override the entire matrimonial property regime. However, the feasibility of protecting business assets with this method weighs heavily on full financial disclosure (both assets and debts) by both parties, complete understanding of the nature and consequences of the contract and the requirement that each party have independent legal advice.
Another category of entitlement that may be at risk if a surviving spouse elects in favour of an equalization claim is in the arena of life insurance and plan benefits. Where the surviving spouse is the designated beneficiary of insurance proceeds under a policy of insurance covering the life of the deceased or a lump sum payment under a pension or similar plan, the surviving spouse must credit any such payments against his or her equalization payment. Furthermore, if the total payments received as a designated beneficiary exceed the equalization payments, the estate of the deceased spouse is entitled to receive that excess from the surviving spouse. Thus, one option for the business owner who wishes to protect the testamentary gift of shares of his or her business to a child is to purchase life insurance in a sufficient amount that discourages the surviving spouse from making an equalization claim.
These are just a few of several options available. To explore your options to protect your business assets and ultimately your business succession plan against a matrimonial property claim, please contact Andrea Kelly.
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Andrea Kelly, Lawyer, has extensive experience in wills, trusts, powers of attorney and estate administration matters. She provides clients with a high standard of timely professionalism and expertise, incorporating a very thorough fact finding process. This is quite often enlightening for her clients and facilitates individually tailored services. If you would like to know more, feel free to use the easy contact form or read Andrea’s bio.