Let’s talk about inheritance money in divorce cases.
Someone recently asked me, “What can I do to make sure my money is totally safe if I get divorced?” She was trying to find out how to protect her inheritance from being treated as marital property in the case that, years down the line, she and her husband would get a divorce.
There are certainly some things people can do to protect their money, but in general, nothing is “totally safe” because every situation is different and different circumstances require different approaches to allocating assets (children, debt, income, etc.) Let’s examine further.
Prepare to Inherit
If you know that you’re going to inherit some money from a relative when they pass, the first thing to do is to talk to that person and make sure that, in his or her will, it is specified that the money is left only to you (as opposed to you and your spouse).
Say you’ve been married for over ten years and have children with your husband or wife. Your relative may assume that you will be with your spouse forever, and leave the money to both of you as a couple, as in, “I leave to Rob and Cheryl half of my estate.”
Well, this necessarily means that Rob and Cheryl will split the estate whether or not they remain married—each of them has a reasonable claim on the inheritance once the relative passes away. If instead Cheryl were to go to her relative and request that the inheritance be left solely to her, she will have a better chance of preserving it for herself in the case that she and Rob get divorced down the line.
Keep the Money Isolated
Once you do inherit money, you must keep it isolated in order to maintain your claim in the case that you get divorced.
By way of example, let’s say Rob and Cheryl have a joint checking account and Cheryl’s relative dies and leaves $200,000 in her name alone. If she were to then deposit that money into a shared account with Rob and it is commingled with marital funds, it becomes shared money since both of them have access to the account, use the account, and presumably use it for shared expenses. [You can try tracing the individual funds, but that is expensive and difficult.]
This is called commingling money. When Cheryl commingles her inheritance, it is no longer solely hers; now it is marital property, and even though it was initially hers and hers alone, the Court will now see it as joint property.
Likewise, you cannot use inheritance for a joint purpose. If Cheryl chooses to use her $200,000 to refinish the basement on the home that she and Rob own together, it will generally be interpreted as intending to commingle the inheritance unless there is documentation to the contrary.
In order to keep the money separate, Cheryl needs to open an individual account with only her name on it, put the inheritance in that account and not commingle the money. Don’t deposit joint assets, paychecks or joint gifts into that account. I tell my clients to keep an account that is solely intended for the inheritance.
Any appreciation/interest on the account is likely to be considered joint property; however, the Courts take into consideration that the appreciation was not contributed to by the other side.
Get a Pre- or Post-Nuptial Agreement
Most of this hassle can be avoided by signing a pre- or post-nuptial agreement. I’ve written about these types of agreements a lot because I believe in them so strongly; click HERE and HERE to read further.
If you are going through a divorce and have questions about inheritance or would like to talk to someone about forming a pre- or post-nuptial agreement, call our office at 303-449-1873 to set up a free consultation.