Inheritance is a gift from someone who was important in your life. If that inheritance is substantial, it has the potential to change your life.
If you’ve received a substantial inheritance or if you know you will at some point in the future, you want to make smart and responsible choices regarding that inheritance. If you’re married or if you intend to get married, this guide will tell you how to protect your inheritance from divorce.
Let’s dive right in.
What Constitutes Inheritance?
An inheritance is anything willed to you by someone who passed away. When many people think of inheritances, they think of cash. Large sums of cash are the least common form of inheritance. An item with substantial financial or sentimental value is also an inheritance.
Inheritance also includes homes and other real estate, stocks, art, jewelry, antiques, cars, and other physical possessions. If you inherit a restored classic car from a relative, you’ve inherited the value of the car. If it’s appraised at $50,000, it would be considered a $50,000 inheritance.
Is Inheritance Protected From Divorce?
Inheritance is almost always protected from divorce. If someone left something to you, it isn’t presumed that they left it to your spouse. You may not have even met your spouse at the time the documents were drawn up for your inheritance. Most states recognize inheritance as separate property, not subject to equal or equitable distribution, depending on the state laws.
There may be some circumstances where the way you handle your inheritance can impact your spouse’s ability to lay claim to it. If you handle your asset as though it’s separate property, you can eliminate the possibility that your spouse can rightfully lay claim to any part of your inheritance.
Is My Spouse Entitled to a Part of My Inheritance?
If the inheritance is considered separate property and was not commingled with marital assets, it may remain solely yours. However, if the inheritance was used to benefit both you and your spouse or was commingled with joint property, it may be subject to division in the event of a divorce or separation.
Can My Spouse Claim My Inheritance in Divorce?
Your spouse cannot claim any assets you inherited since it is a separate property and not subject to division in case of divorce. So, if the inheritance was intended for you only and not your spouse, and you kept it separate from the marital estate, your spouse will not receive any part of it.
However, the situation will differ if the inherited property is commingled (mixed) with marital property. In this case, there’s a good chance these assets will be included and divided between you and your spouse during divorce proceedings.
When Does an Inheritance Become Marital Property?
Inheritance can become marital property through commingling, a legal term for mixing separate and community property. A part or all of your inheritance may convert to marital property if you don’t keep it separate from other marital funds.
Several examples of commingling are when you put inherited money into a joint account, buy a house where you and your spouse live as a family, or use it for shared mortgage payments and household expenses.
Separate Property vs Community Property States
When you get divorced, you and your spouse are required to provide a comprehensive list of all of your assets. These assets will be divided as a part of your divorce settlement. There are two ways states can handle marital property in a divorce.
Most states use a separate property system, which is also called a common law property system. In common law property, everything you had before you got married and things you bought for yourself during your divorce are considered your property.
If you bought an asset like a car or a home you shared with your spouse, it can be divided in a divorce. If you’re the only owner on the title of an asset and you rarely allow your spouse to use it, it’s regarded as exclusively yours.
A few states still use community property law. In a community property state, almost everything you obtain during a marriage (except for inheritance) is considered marital property. If you bought yourself a car and didn’t allow your spouse to use it, it’s considered a purchase made with marital community money. It can be part of the pool of assets you’ll divide during a divorce.
While your inheritance will always be yours, the things you purchase with your inheritance may not be. If you use a cash inheritance to make an expensive purchase, like a car or a home, you’ve introduced your inheritance money into the community property pool.
How to Keep Your Inheritance Separate
Your inheritance will always belong exclusively to you, as long as you don’t commingle accounts or assets with your spouse. If your inheritance is cash, you should keep it in a separate, private bank account.
Don’t add your spouse’s name to the account or add them as an authorized user to cards that draw from that account.
If your inheritance is a piece of property, like a home, keep the home exclusively in your name. If you ever decide to rent the house, it becomes a business venture. If you add your spouse’s name to the property or allow them to do any kind of work relating to the rental of the house, it could be considered marital property.
If your spouse helps with your rental property (i.e. collecting rent payments or performing repairs on the property), they might be able to legally lay claim to it.
They’ve added value to the investment through labor or worked for your “business” as a landlord. If you use a property management company or hire a contractor, you’ll be able to keep the asset separate from your marriage.
If you sell the rental property and use it to purchase a newer home, you’ll also need to keep that home in your name. If you add your spouse to the title of the new home you’ve purchased, they now technically own half of the result of your inheritance.
If they were on the title of the home you sold and you used the proceeds towards the new property, they can also claim that they’re part owner of the home you purchased.
Your inheritance needs to remain completely separate from anything you share with your spouse. If you use cash from an inheritance to fund something your spouse can claim ownership of, you’ve commingled your inheritance.
How to Protect Your Inheritance From Divorce
Your inheritance will always be protected by default the moment you receive it. When you use your inheritance to buy things you’ll share with your spouse, things get a little trickier.
If you receive your inheritance before you get married, you can protect your inheritance (and the things you’ll purchase with your inheritance) from divorce. If you’re already married, you can protect them with a postnuptial agreement.
With a Prenuptial Agreement
If you receive a large inheritance before you get married, you can protect it with a prenuptial agreement. Your agreement can state that your inheritance (or the things you’ve bought with cash you’ve inherited) belong specifically to you.
With a Postnuptial Agreement
If you receive your inheritance after you get married, you can protect it with a postnuptial agreement. A postnuptial agreement is an agreement you make about what will happen in the event of a divorce.
The difference between a prenuptial agreement and a postnuptial agreement is that a postnuptial agreement is created after you’re already married.
This situation is tricky. If you suddenly find yourself with a lot of money and your first response is to draft up a document that tells your spouse that they can’t have it in the event of a divorce, your spouse is probably going to be upset.
It might look like you plan to take the money and run. Your spouse may feel like you don’t trust them when you hand them a postnuptial agreement several years into a marriage.
In addition to causing emotional friction, postnuptial agreements are also difficult to enforce. Your spouse could challenge a postnuptial agreement at the time of your divorce. A very experienced lawyer can successfully have a postnup effectively “thrown out”.
You should consider a postnup carefully. If you decide it’s not the best idea for your situation, try using the strategy of keeping your inheritance separate and not commingling it with other assets. Your inheritance has some innate protection from divorce, and if you’re smart about how you handle the inheritance, that protection might be enough.
By Creating a New Will
You can pass on your inheritance to your children or another family member if you draft a new will or estate plan after you receive your inheritance. If you place some (or all) of your inheritance into a trust or an investment, you can will that investment to someone else.
This helps to establish the inheritance as separate property, which will protect it in a divorce. It also secures your assets in the event that you pass away.
The inheritance will go directly to its intended recipient rather than going to your spouse by default. Creating an updated will is an excellent solution for couples who are legally separated or estranged with no immediate plans to get divorced.
You never know what may happen, and a new will can act as a safety net to distribute your assets the way you’d like them to be distributed.
Inheritance vs. Trusts in Divorce
Depending on what type of property they belong to, both inheritance and trusts may or may not be divided in a divorce. Usually, the property inherited through a trust fund is the separate property of its beneficiary (a person for whom this trust was established).
Receiving inheritance via a will is similar to getting it from a trust. An inherited trust, however, won’t be subject to probate, an expensive court process of distributing assets between the beneficiaries. Some types of trusts can also save their beneficiaries from paying huge taxes.
The main difference between a trust and an inheritance is that trust assets are held for a specified period and are generally more protected from lawsuits than outright inheritance. Another difference is that the trust fund may be established for a person while its settlor (creator) is still alive, whereas you only get an inheritance after the estate owner dies.
If a person inherits property through a trust before or during marriage through trust or inheritance, it will be excluded from a marital property pool. However, if part or all of the inheritance is commingled with the marital estate, it will be difficult to separate the two in court.
In Conclusion: Protecting Your Inheritance is Simpler Than You Think
You may not have to do much to protect your inheritance from divorce. The family law already recognizes that your spouse doesn’t have a claim to your inheritance.
As long as you keep the inheritance separate from your spouse by keeping the account or asset exclusively in your name, it won’t be subject to property division in a divorce.
If you have questions about securing your inheritance, it’s best to ask a lawyer for specific advice. They can help you navigate your state’s laws regarding inheritance and marital property.