Shielding an inheritance from divorce isn’t overly complicated, but it does require inherited assets to be kept separate from marital property. This means avoiding co-mingling inherited funds with joint accounts or using them for joint expenses. Establishing a clear paper trail that documents the inheritance and its usage is essential. Additionally, considering a prenuptial agreement or trust can offer you an extra layer of legal protection in the event of a divorce.
Whether you’re just starting a life with your new spouse or going through a divorce, a financial advisor can help you create a plan for your goals and needs.
How Inheritances Are Handled in Divorce
Divorce proceedings often involve the complex task of dividing a couple’s assets, and inheritances can potentially complicate this process if the inherited property becomes marital property.
In common law states, assets acquired during the marriage are considered marital property, while those obtained individually are separate property. Inheritances usually fall into the category of separate property, meaning they are typically not subject to division during a divorce.
Community property states operate under a different legal framework. In these states, any property acquired during the marriage is considered community property and is typically split equally in a divorce. However, inheritances are an exception to this rule. Like in common law states, inheritances in community property states are usually regarded as separate property and are not divided between spouses.
| Common Law (Equitable Distribution) States | Community Property States |
|---|---|
| Alabama, Alaska*, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wyoming. | Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin. |
When You May Lose Your Inheritance in Divorce
Losing an inheritance in a divorce typically happens when the inherited assets are commingled with marital assets. For example, if you deposit your inheritance into a joint bank account, use it to pay off a mortgage on a jointly owned home, or invest it in a business owned by both spouses, the inheritance can lose its separate property status.
Once commingled, it is challenging to trace the original funds, making it easier for the court to deem the inheritance as marital property and subject it to division. Keep in mind that inherited money that’s used to pay off marital debts may also lose its status as separate property.
Transmutation is another concept where separate property is transformed into marital property through certain actions. This can happen if you put your spouse’s name on the inherited property, such as adding them to the title of a house you inherited. By doing so, you effectively change the nature of the asset, making it a shared property. Courts often look at the intention behind such actions, and if it appears you intended to gift the inheritance to the marital estate, it can be divided in a divorce.
How to Protect Your Inheritance From Divorce
To protect an inheritance from a divorce, you can keep it in a separate account and avoid commingling it with marital assets, among other strategies. Here’s a closer look at five common strategies:
Keep Inheritance Separate
When you receive an inheritance, the best way to protect it from divorce proceedings is to keep it separate from marital assets. This means not depositing the inheritance into joint accounts or using it for joint purchases. By maintaining the inheritance as a distinct entity, it remains clear that it is solely yours, making it less likely to be considered marital property during a divorce.
Establish a Trust
Creating a trust can be an effective strategy to shield your inheritance from divorce. By placing the inherited assets in a trust, you can designate specific terms for how the assets should be managed and distributed. A trust not only provides clarity and protection but can also offer tax benefits and maintain beneficiary designations, regardless of marital changes.
Sign a Prenuptial or Postnuptial Agreement
A prenuptial or postnuptial agreement can provide explicit protection for your inheritance. A prenuptial agreement is signed before marriage, outlining how assets, including any future inheritance, will be handled in the event of a divorce. Similarly, a postnuptial agreement is created after marriage and can serve the same purpose. Both agreements help to legally safeguard your inheritance by clearly defining it as separate property.
Create a New Will
Updating your will after receiving an inheritance is important. A new will can specify how you want your inherited assets to be distributed and protected. By clearly stating your intentions, you can reduce the risk of disputes. This step is particularly important if your marital status changes, as it reflects your current circumstances and desires.
Maintain Proper Records
Keep detailed records of how and when you received your inheritance. This documentation can be crucial if your inheritance is contested during the divorce proceedings. Additionally, if you inherit property, such as a house or land, and want to protect it from potential divorce, you’ll need to maintain the title in your name only. Do not add your spouse’s name to the deed.
Bottom Line
By keeping inherited assets separate from marital property, avoiding commingling funds and maintaining clear documentation, you can safeguard your inheritance. Additionally, legal tools such as prenuptial agreements, postnuptial agreements and trusts provide an extra layer of protection.
Financial Tips for Divorce
- It may help to work with a certified divorce financial analyst (CDFA) – a financial advisor who specializes in helping divorcing spouses navigate the financial realities of their split. The CDFA credential is one of a number of certifications that financial advisors can pursue. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A divorce will likely impact your tax filing status and tax liability. It’s important to figure out how your new filing status will affect your marginal tax rate. You’ll also want to update your W-4 to ensure your employer is withholding an accurate amount. Here’s what else you should be thinking about when it comes to tax planning after a divorce.
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