Inheritance and Divorce: Important Details to Know
Inheritance and divorce are two complicated topics. Combine them, and you have yourself a nightmare.
Fortunately, most states have clear-cut laws determining what's considered separate property or not regarding inheritances. However, like any laws and procedures, there may be loopholes that a person can use to their benefit.
Here's everything you must know about inherited property and assets to ensure they're handled properly.
*Note that this article is for general, informational purposes only, and it should not be considered legal, tax, or investment advice. For help with your specific situation, contact the appropriate professional.
What Are My Inheritance Rights?
Divorce proceedings may include inheritances, depending on the circumstances and where you live. State laws differ; some states are “community property” states, and others are “equitable distribution” states. Community property states divide marital assets (and debts) 50/50, but equitable distribution states leave distribution up to the judge, who must choose a fair distribution.
Typically, inheritance is considered separate property and not involved in the divorce, but several circumstances can change this, allowing you access to an inheritance if it's proper.
Inheritance In a Divorce
In most states, inheritance is considered separate property, no matter when a spouse receives it. However, some loopholes may pertain to your situation.
Most importantly, if you inherit money and share it with your spouse, it can alter the decision. For example, putting cash in a joint account or putting your spouse's name on a house you inherited makes the assets marital property. As a result, a judge may award both parties a portion of the proceeds.
To convince a judge otherwise, one would typically need ample proof that the property was separate and not used for joint purposes.
How Can Someone Keep Divorce and Inheritance Separate?
This may sound unfair. Let's say, for example, Aunt Sally left you $500,000, and you get divorced one year later. You probably wouldn't find it fair to share 50% of the proceeds with your now ex-spouse.
To keep the cash as separate property, you must deposit the funds into a separate bank account without your spouse's name. You should also refrain from using the funds for any common uses. For example, using the inherited funds buy something for the both of you makes that thing you bought a marital asset. If you use those funds to pay bills or even pay for any enjoyable experiences for the both of you, then the funds used are simply spent and gone, and you likely cannot ask in divorce for a “credit” for what you spent on those bills or otherwise.
The minute you commingle the funds, a judge can consider it marital property and include the assets in a divorce proceeding and analysis. However, if the inheriting spouse keeps the funds separate, then in many cases, the inheriting spouse keeps the funds.
How to Divide an Inheritance in Divorce
An inheritance and divorce settlement can be complicated. A judge will determine how to divide the inheritance fairly in an equitable distribution state. If you live in one of the few community property states, the judge may split the inheritance 50/50 unless you contest it.
No matter your state laws, you can plead your case using a divorce lawyer to help you keep your inheritance or at least a majority of it. The key is to have ample records proving you kept the property separate. If you don't have paperwork (or electronic) proof of how you used the funds, your ex-spouse could try to claim that you commingled the funds.
Postmarital and Divorce Agreements
If you're worried about receiving an inheritance after divorce, you may consider a postmarital or postnuptial agreement if allowed by your state.
A postmarital agreement is similar to a prenuptial agreement in that it pertains to what happens in case of divorce, but the agreement is executed after you are already married. You may even also request in the postmarital or postnuptial agreement that the relevant inheritance be a part of the divorce agreement, allowing you to address the issue before it arises.
It's important to use a reputable lawyer when creating postmarital agreements to ensure they are held up in court should that be necessary.
Inheritance Before a Divorce
If only one spouse received the inheritance before the divorce, you (as the other spouse) might receive part or nothing. It depends on how your spouse manages it. For example, if they kept the inheritance separate from the other marital assets, you would typically inherit none of the assets. However, if they commingled the funds or physical assets, such as real estate, during the marriage, you may be entitled to some of the marital funds during the divorce proceedings.
It's a process to prove your spouse shared the assets, but with the right documents and lawyer, you may prove you are entitled to some of the funds.
Prenuptial Agreements
Prenuptial agreements are agreements between you and your soon-to-be spouse about handling any pre-existing assets, such as an inheritance and what happens with the inheritance, in the case of a divorce. This agreement is a way to protect one’s assets that supersedes state laws, as long as it is properly drafted and the court determines that it holds up. However, that's not always the case - especially if you didn't have a reputable and knowledgeable attorney prepare it.
Consult a Lawyer
Prenuptial agreements aren't a sure thing. Don’t assume that your spouse isn't entitled to a part of your inheritance just because you created a prenup. Always consult a lawyer when making the prenup and during the divorce process. This increases your chance of keeping the inheritance during a divorce; just be aware that there's never a guarantee.
If your spouse had a prenup drawn up for you, it's a good idea to have a reputable lawyer review it before signing it and/or during a divorce to determine your rights.
Inheritance After Divorce
In many cases, receiving an inheritance after divorce is a non-issue because you are no longer married. However, if you're concerned about it, talking to your lawyer about including it in the divorce agreement could provide peace of mind.
There is an exception, though.
If you pay alimony or child support, your ex-spouse could take you back to court to fight for a larger payment due to your inheritance. Whether you can do this depends on your state laws and whether they allow modification agreements.
Some states include inheritance in a modification request, while others don't. Even if you live in a state where they consider inheritance allowable income, it must be a sizeable inheritance to make a difference, or the judge may not waste their time.
When Does an Inheritance Become Marital Property?
An inheritance becomes marital property when the money or assets are used for joint purposes. There are many ways this can happen, but here are a couple of examples.
John and Mary were married for ten years. During the marriage, John received a large inheritance in cash. He deposited the funds in the joint bank account with Mary, so now Mary's name is on the assets, too. John and Mary used the funds for many joint occurrences, including taking a couple of vacations and buying a vacation home with both names on the deed.
While the inheritance should have been separate property for John, he commingled the assets with Mary, and so those funds would likely be considered marital property in any divorce proceedings. If John had kept the assets in a separate account, he might not be in the same situation.
Now let's look at an example with physical assets.
Jack and Joan were married, and Joan received a plot of land as an inheritance during the marriage. While the property acquired only had her name on the deed, Jack built a rental property on the land. At this point, the additional value Jack created may be considered a marital assets (at least in part).
Inheritance and Divorce FAQs
Is a Spouse Entitled to Inheritance Money
Spouses aren't always entitled to the inherited money, even if they can prove the inheriting spouse commingled the funds. However, if the one spouse who received the inheritance has specific records regarding how they handled the funds and can prove a portion (or all of it) was kept as separate property, they may be able to keep those funds out of any divorce agreement or judgment. Of course, every situation differs based on the location, situation, and how the judge (if relevant) sees the case.
Is an Inheritance Community Property When Received After Divorce?
Since inheritance money isn't community property in most states while married unless commingled, it's not community property after divorce. Of course, you should always consult your lawyer, but in most cases, inheritance doesn't come into play after divorce unless alimony or child support is involved. Even then, the receiving spouse must request a modification, and the case must go to court.
Can I Claim an Ex-Spouse's Inheritance After Our Divorce Is Final?
It's very rare to claim an ex-spouse's inheritance after the divorce is final. The only leg you might have to stand on is if you receive alimony or child support and have reason to believe the inheritance increased your ex-spouse's income, such as if they receive interest income on a large amount of money.
Even in this case, you must consult your law firm and take your spouse back to court to let the judge decide.
Inheritance and Divorce: The Bottom Line
In real life, divorce happens, so it's a good idea to protect any inheritance received if you intend to keep it as separate property. This can actually create more of a sense of safety and peace of mind within the marriage. The general rule is that inherited property and assets are separate, but many situations can make them community property or shared property, possibly even after divorce.
Want to level up your game around money in your relationship? My free quiz will help you learn your Couple’s Money Personality Type AND how you can grow from there!
Adam Kol is The Couples Financial Coach. He helps couples go from financial overwhelm or fighting to clarity, teamwork, and peace of mind.
Adam is a Certified Financial Therapist-I™, Certified Mediator, and Tax Attorney with a Duke Law degree and a Master's in Tax Law from NYU. He is a husband, dad, and musician, as well.
Adam's wisdom has been shared with The Wall Street Journal, the Baltimore Ravens, CNBC, NewsNation, and more.
