Keeping it in the Family: Family Law Considerations for Inherited Business Assets

Planning to keep a business in the family often means that a business owner needs to consider the legal implications of transferring business assets to a relative. A prudent business owner should think about family law and the property rights of the extended family –namely, spouses and common law partners. A measure of forethought and some timely advice for the intended recipient can go a long way toward ensuring that inherited business assets are passed down however the original owner intends. A spouse may use family law to protect inherited business assets in the event of a separation or divorce. Under Ontario’s Family Law Act, inherited assets are generally excluded from a married couples’ “net family property” and thus are not subject to division in the event of a marriage breakdown. In other words, exclusion of assets means that they can remain untouched should a separation occur. However, the treatment of inherited assets after acquisition can later cause that excludability to be lost, leading to these assets (or the value of the assets) being divided with a spouse according to applicable family law principles.

While the law in this regard is full of nuances, two common circumstances may lead to one spouse sharing in the business interests of the other. Firstly, though the excludability of inherited assets might be clear at the time of their initial transfer, this exclusion is muddled if ownership of business assets is thereafter shared with a spouse or if the assets are commingled with the family’s general finances (a particular point of consideration for sole proprietorship business models). Secondly, even if ownership of the business or related assets is kept distinct, the non-owner spouse will sometimes gain an interest in a business or its value after taking on a significant internal role or otherwise contributing to the success of the business, either through labour or financial contributions.

Even common law spouses – who do not presumptively share in the same joint economic partnership as married spouses – may similarly come to have an interest in inherited business assets of the other partner unless clear advance steps are taken to define mutual expectations about the parties’ rights in the family business.

Encouraging the intended recipient of business assets to meet with a family law lawyer can help to build a cohesive post-inheritance plan grounded in a meaningful appreciation of what property will or will not be shared with a spouse. Better still, a well-crafted “domestic contract,” such as a prenuptial agreement or cohabitation agreement, can bring the other spouse or common law partner into the discussion, securing advance arrangements and a mutual understanding about the extent to which inherited business assets will be shared, and any limits which will be imposed.

Whether seeking legal advice, making a domestic contract, or dealing with disputes arising at a later stage, the lawyers at Waterous Holden Amey Hitchon LLP have experience navigating wide-ranging considerations dealing with the intersections between business ownership and family law.