When married spouses separate, they are subject to the property division regime found in the Family Law Act, unless otherwise agreed to in an enforceable domestic contract. The Family Law Act provides for the “equalization of net family property” upon the breakdown of marriage, or when one spouse dies. Both spouses are generally entitled to one half of the value of the net property accumulated during the marriage.
An important general exception to the above is an asset that a spouse inherits during the marriage. Such assets are “excluded” from the spouse’s net family property, so long as the asset is not comingled with the other spouse’s assets, and the asset still exists on the date of separation. For example, if Husband inherits money which is placed into a joint account with Wife, the exclusion may no longer apply. Or if Husband keeps the money in a solely owned bank account but spends all of it, an exclusion may no longer apply.
The biggest exception to the doctrine of exclusions is the matrimonial home, which generally cannot be excluded from a spouse’s net family property.
Further, if one spouse inherits assets before the date of marriage, the value of same is “deducted” from the spouse’s net family property. The distinction between a deduction and an exclusion allows for the doctrine of “tracing”, which only applies to exclusions. If an asset that was inherited during the marriage no longer exists at the date of separation, it may still be excluded from that spouse’s net family property if it is traceable into another asset. For example, if Wife inherits money during the marriage, which she uses to purchase a vehicle, the value of same may still be excluded from her net family property.