Divorce courts see inheritances as separate property, distinct from marital assets and not subject to division. While core principles govern inheritances in a divorce, each state controls the nuances. Other factors that also affect this are transmutation and appreciation through marital effort.
The following post is a guide for inheritors concerned about how a divorce will affect their inheritance. It illuminates how the law addresses the issue. But we must remember the rules can change. So, while the guide provides a comprehensive review, don’t take any legal action without first consulting an experienced divorce lawyer like those at Davis & Associates.
Understanding Property Division Law
Inheritances received before marriage generally become untouchable in a divorce. Even those received after marriage remain separate, especially if protected through trusts or avoiding commingling. However, in reality, what actually happens is complicated and often frustrating. For instance, trusts aren't as indestructible as one might imagine.
Irrevocable trusts are strong safeguards, yes. They cannot be accessed or modified by external entities. However, if the trust releases regular distributions, or disbursements can be discretionary based on circumstance or need, those payments can be viewed as a spousal obligation.
In divorce cases, trust proceedings might prompt lower or eliminated distributions, a tactic used to avoid their inclusion in property division. But the move doesn't ensure it won't still happen.
Lastly, you may also face an opposing spouse who claims the inheritance is communal. They will try to push the inheritance from separate to marital property.
Separate Property
Separate (or community) property is defined as assets belonging to only one spouse. Inheritances fall into this category. Even an inheritance (or gift) given to a spouse during the union is generally considered separate property.
Marital Property
When a spouse acquires assets during the marriage, the law sees them as communal. Assets include real estate, personal property, vehicles, finances, IRAs, and items valued at $500 or more. When given after marriage, inheritances are usually excluded from marital assets. However, that can be jeopardized based on how the inheritance is managed.
Commingling
The biggest threat to inheritances is commingling. If the court sees signs of commingling, it may see the inheritance as marital property. To clear the matter, courts will want a forensic investigation. And the burden of proof falls on the inheritor.
Commingling is the result of:
- Depositing inheritances into a shared account.
- Using the inheritance to buy property jointly with a spouse or using any portion of the inheritance on property owned by the other spouse.
- Adding your spouse to a deed, car title, or investment account.
The big threat behind mixing inheritance and divorce is commingling. To avoid this:
- Use separate accounts in your name and do not deposit any marital assets into them, including your own earnings, salaries, etc.
- Do not use the inheritance for joint investments.
- Resist putting another's name on inherited property; use personal, as opposed to marital, income to pay taxes, mortgages, and maintenance.
- Keep detailed records of how you manage the inheritance.
- Create a trust that protects the inheritance.
The court also looks at when payments are made in relation to the divorce.
Protecting Your Inheritance
The biggest obstacle is letting your inheritance be seen as a shared asset. You must position yourself so that this challenge is never in question. Watch for the two main distractions here.
Appreciation Through Marital Effort
Inheritors should keep in mind that separation doesn't necessarily negate the concept of shared. The framework for appreciation is that the efforts of one spouse to grow assets change the inheritance status. The appreciation (increase in value) could shift the tide toward marital property. The court could see the spouse's contribution as fundamental in the growth of a collaboration. That can encompass renovating private property to use as an Airbnb or second home, or opening a restaurant. You, in essence, create a joint venture you endorsed. In turn, that can legally make the inheritance subject to division.
Transmutation
Transmutation will be a tough hurdle in a divorce. You use inherited assets to make a down payment on a property or other entity. Or fund a transaction that’s executed in both spouses' names. The courts may interpret the move as a gift to the marriage. It’s a slope that could leave your inheritance under the dictate of a judge. Should you feel the need to invest the inheritance in any way that connects to your spouse, get specialized legal counsel. Only an attorney who understands property division specific to your region can protect your interests.
What If the Inheritance Involves Recurring Payments?
In many cases, inheritances are structured for recurring or periodic payouts. They're set up with trusts, annuities, pensions, and retirement accounts; these practices are strategic, ensuring inheritances aren't squandered. The arrangement also takes advantage of tax breaks and protects inheritors from disqualification from receiving benefits like SSI and Medicaid. A trust will be valuable. The terms of a trust reinforce the inheritance status (marital versus separate).
How an Inheritance Could Be Divided
If your inheritance is seen as community property, how it's divided depends on the jurisdiction. It boils down to whether the marriage and estate are part of an "equitable" or "community" state.
Equitable Distribution
The majority of states use the equitable distribution principle. Using its specific guidelines, the court will set a fair split. The split may not be 50/50. Adjustments could be made that account for length of the marriage, dependents, financial situation of each spouse, and more.
Community Property
Only a small number of states recognize community property in divorces. The courts in these regions review joint ownership, shared debt, contributions, future earnings, etc., with a focus on 50/50 ownership, though that split isn’t mandatory.
Conclusion
Managing divorce and inheritances requires coordination. The intersection is best handled by a lawyer adept at the proceedings in your state. Prenups are definitely a consideration to minimize future problems. Bottom line: whether you’re getting married, are already in a union, or facing a divorce, the best way to ensure none of these circumstances endanger an inheritance, even with the best guardrails, is to consult with a local divorce lawyer.