An issue too few individuals think about prior to divorce centers on inheritance, so we thought we would take a moment and explain the common pitfalls and how to protect yourself from letting your spouse leave the marriage with half of your inheritance.
An inheritance falls into the general category of gifts. If you receive the inheritance before the marriage, it is considered separate property. If you receive the inheritance during the marriage, and it is a gift just to you, it starts as your separate property.
Things get complicated after you take control of the inheritance. In general, the asset remains your separate property unless and until you do something that indicates some intention to share with your spouse. So, for example, if you receive $100,000 from your uncle’s estate and you deposit it all into your joint savings account, you just converted the separate asset to a marital asset. So the first rule upon receiving the inheritance: keep it in a separate account with your name only and do not commingle it with marital funds or title it jointly with your spouse.
What if you receive a significant sum and you want to use some of it for home improvement or a down payment on a new house? If you take the funds and the home becomes a joint asset in both spouses’ names, you have essentially gifted half of the down payment to your spouse. So, prior to any such transfer, you can enter a postnuptial agreement with your spouse indicating that the funds are intended as your separate property in the event of a divorce.
What if you inherit an actual house and you and your spouse reside in it? Living in the house poses no problem as long as the asset is titled solely in your name. But if your spouse makes contributions (like paying the mortgage or paying for upkeep or improvements) you run the risk of converting the asset to a marital asset. At a minimum, your spouse will have claim to the contributions to the asset.
What about the gains on the investment during the marriage? That again can get tricky depending upon how you have managed the asset. As long as you keep the asset in a separate account and do not add marital funds to the asset, the gains on the asset stay separate property. But if you start to mix marital funds into the asset, you risk conversion to marital property. As with the house example, the best protection is a postnuptial agreement.
Bottom line: if you want to protect your inheritance from your spouse, always keep the asset in a separate account, never jointly title it in your spouse’s name, never commingle with marital funds, and consider a postnuptial agreement.
If you have questions about inheritance and divorce, contact us – we can help.