It is not uncommon for divorce to bring out the very worst in people, especially when a soon-to-be ex-spouse is used to being the one in control of the relationship. The contentious tug of war can even result in threats to an inheritance that you know was always intended just for you but unfortunately was not kept or segregated as it should have been.
While most people are unlikely to experience a Succession-like drama over control of a multibillion-dollar media conglomerate, you should be keenly aware that money from an inheritance received before or during a marriage can, in fact, be one of the most high-stakes exceptions in a marital estate.
Things get complicated when inherited funds are commingled with marital property or when inherited property has your soon-to-be ex-spouse’s name on title documents. And when things get complicated in divorce, they can trigger an extremely costly legal battle with the ultimate outcome decided by a judge.
If you anticipate receiving significant assets from an inheritance, there are careful considerations and actions you should undertake to maintain control before depositing any checks from an estate or signing paperwork reflecting ownership of property.
Here are some tips that can help you preserve your inheritance as separate property that is not subject to division:
- Keep inherited funds in an account titled only in your name, not in any bank or investment account(s) that you share with your spouse. Do not deposit any marital funds into that account or use funds from that account to purchase property that will be held in both your names.
- Pay any inheritance-related taxes with separate property funds.
- Inherited property intended for you should include documentation demonstrating that ownership is in your name only. Check the deed, title, or other ownership record at the time the property is first inherited to ensure your spouse’s name is not included.
- Creation of a separate trust to hold your inheritance could also preserve the exception because in the event you predecease your spouse, the assets will pass to a beneficiary that you name, such as your children, as long as the trust is drafted accordingly.
When we refer to inherited property, we are not only focused on money but real property, business interests, and personal property as well as business interests and real and personal property purchased with inherited funds. How to maintain the separate property character of such assets varies greatly depending on the type of asset, if there are any community funds also invested in the asset, and whether there has been time/efforts spent on the asset.
Although prenuptial agreements elicit uncomfortable feelings ahead of the romantic promise of a lifelong commitment, they are vital for anyone who anticipates a substantial inheritance in their future. For high-net-worth individuals, one of the many threats a prenup can guard against is the inclusion of gains from an inheritance as part of the marital estate.
If you have already commingled inherited funds or property because you were not aware or mindful of the above considerations, you will likely face a tough battle attempting to untangle the comingled assets and reclaim sole ownership. If funds are commingled, the burden is on you to prove that the inheritance was never intended to be shared with your spouse. Everyone’s situation is different, so consulting with a divorce attorney and finding your own financial advisor to help you preserve and document your inheritance is just plain smart.
As always, we are here to answer your questions and address your concerns regarding complex family law matters.