When I inherit, how do I keep that money out of the hands of my spouse?

For the purposes of this discussion, let's assume that there was nothing in your parent's Will that either requires you to share your inheritance with your spouse, nor specifically prevents that from happening. In other words, this discussion is about YOUR actions and what effects they will have on money you inherit from your parents.

If you share your inheritance with your spouse, for example by using your inheritance to pay down a mortgage on a home that you and your spouse both own, then you cannot later decide to take it back. You've already turned your inheritance into joint property and given your spouse a gift of the money. Should you and your spouse later become divorced, the accounting and legal arguments involved in sorting out who owns what part of the home will become expensive and time-consuming.

Keeping a family inheritance separate sometimes becomes very important to individuals who are in second marriages. The individual's goal is often to ensure that the money inherited from his or her parents is passed on to his or her children. They feel that this is more in line with what the parents wanted, rather than have the money passed down through a son-in-law or daughter-in-law to step-grandchildren.

It is possible to keep the money separate. The person who inherits should open a separate account in his or her name only, and put the inheritance in there. Interest earned can accumulate in the account. Nothing else should be added. This way it remains easy to trace the origin of the money and it's clear that no joint money was ever added to it.

This matters if there is a divorce, because in most jurisdictions in Canada, money that was inherited by one of the people divorcing is exempt from being divided with the spouse. As described above, if you don't make sure that it's clearly inherited money and nothing else in the account, that account could be attacked and you could lose some of it.

When you make your Will, you can specifically leave that account to your children. I have always added a few words to my clients' Wills to identify the account as being one that was inherited from a parent. An alternative, of course, is to give some or all of your family inheritance to your children while you are alive, either by a direct transfer or by buying assets in joint names with them.