Is a Spouse Entitled to Inheritance Money?
Receiving an inheritance can be exciting, but when it comes to divorce law, it can get tricky. You'd like to think you keep 100% of your inheritance, but that's not always the case.
So is a spouse entitled to inheritance money?
Keep reading to discover what could happen to your inheritance if you aren't careful.
*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 Is Inheritance Money?
Inheritance money is money or assets you receive from a loved one who passes away. For example, you might receive inherited property (i.e. real estate), funds (i.e. money/cash), or other valuable assets. Any assets you receive as an inheritance and can sell are considered inheritance money, as well.
But is a spouse entitled to inheritance money either while you're married or if you divorce? The lines blur depending on your state and how you use the funds. Inherited assets aren't always considered separate property, so it's important to know how to handle them.
Marital Status and Inheritance
The status of your inheritance depends on a few factors, including your state's laws. For example, some states are community property states, and others are equitable distribution states regarding marital funds and assets. In community property states, inherited property can become a shared asset (AKA ‘marital asset,’ ‘joint property’ or ‘community property,’ among other terms) if it’s used by or for both parties. This may not be the case in an equitable distribution state, where a judge has more discretion regarding how to divide up any shared assets.
If the inherited property was meant for only one spouse ,and you can prove it was only used for that spouse, you might be able to keep the inherited property out of the marital property.
Divorce and Inheritance
Divorce is where inherited funds get tricky. Most assets acquired during the marriage become marital property and are subject to division. But again, if you live in an equitable distribution state and can prove the inheritance is separate property, you may not have to share it in divorce.
To keep the inherited funds separate from the divorce, you must keep them as separate property from all marital property. If you commingle the assets with marital property, they may automatically become a part of the joint property division., whether you’re in a community property state or an equitable division state.
To ensure the separate property, it's best to open a separate account that only one spouse has access to. The other spouse's name should not be on the account, and the funds in the account shouldn't be used for anything within the marriage, anything joint or shared. This avoids commingling the funds and facing property division laws that might not seem fair if the inheritance was meant for you alone.
How Prenups and Postnups Affect Inheritances in a Marriage
Prenups are agreements you sign before you get married. It states what the marital property will be and what will remain separate property. Both spouses sign the agreement, and in the case of divorce, the assets are divided according to the agreement.
Since you can't predict inherited assets, you can also sign a postnuptial agreement, which is an agreement regarding marital assets (or what could potentially be considered marital assets) and their division while married. The agreement, like the prenup, will determine how any assets, including inherited money, will be divided should you divorce.
Is a Spouse Entitled to Inheritance Money
A spouse isn't automatically entitled to inheritance funds. It depends on how you own the assets and the divorce laws in your state.
The good news is that you can protect your inheritance money from your spouse if you worry about divorce or if the inherited asset was meant specifically for you and you want to keep it that way.
How to Protect Your Inheritance From Your Spouse
The key to keeping your inheritance separate is to avoid commingling. But unfortunately, as soon as you commingle funds, it's almost impossible to keep them out of the divorce.
The best way to protect your inheritance is to keep it as separate property from the get-go. Keep the account in your name only, and don't put your spouse's name on the account. Also, be very careful about how you use the funds. If you use them for any purpose that benefits your spouse, they may very well be considered joint funds, and most judges will therefore include them in any divorce judgment.
Instead, keep careful records of where you placed the funds and how you use them. If you have kept the funds separate, in an account that your spouse can’t access, and you can prove that you haven’t used them for anything that benefits the marriage, then you will likely be able to keep those funds as separate property.
Is a Spouse Entitled to Inheritance Money FAQs
Is a Spouse Entitled to Inheritance Money in Texas?
Texas is a community property state. This means most assets owned in the marriage are divided equally during the divorce. However, there aren't any laws stating that an inheritance automatically goes to the spouse. The key is to avoid commingling the funds. If you use the funds for any benefit of the marriage, they likely become a part of the community property in Texas.
Is an Inheritance Community Property?
In most cases, an inheritance defaults to being separate property, not community property. In some states, an inheritance may be considered community property, but certainly not all states. For example, if you live in an equitable distribution state, you might be able to keep the inheritance separate if you can prove you didn't use the funds for any part of the marriage.
When Does an Inheritance Become Marital Property?
An inheritance becomes marital property when both spouses benefit from the assets. For example, if you put the funds in a joint account, they become the property of both spouses and part of the divorce agreement. In community property states, it's harder to prove the assets belong to one spouse, not both.
Is Inheritance Community Property in California?
California is a community property state; however, inheritance is separate property by default. Therefore, according to state law, if you avoid commingling the funds in the marriage, the person who inherited them keeps them after divorce. This also means, however, that if you aren't careful, you could lose half of your inheritance by using the funds in the marriage.
Is an Inheritance Considered Income?
An inheritance isn't income, so it's not subject to income tax. However, any earnings you make from the date you inherit the funds, such as interest or capital gains, may be taxable. Consult a qualified accountant or attorney about your specific situation.
If You Were to Inherit Real Estate From Your Parents, Is Your Spouse Entitled to Half of It Due to Marriage?
Inheriting real estate from your parents doesn't automatically entitle your spouse to half. It depends on the state laws and how you use (or don’t use) the assets. For example, if the inheritance is separate property in your state, and your spouse doesn't benefit from the real estate, it will remain your sole property.
The Bottom Line
If you inherit money, you may want the courts to consider it separate property so that you’d keep it if you divorce. But the case of marital property and funds can get confusing, so it's always best to work with a financial advisor, accountant, and/or attorney when you receive an inheritance to determine the best way to handle it. If you're interested in seeing what financial counseling is all about, take advantage of my hour-long complimentary consultation!
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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.
