When a couple divorces, important financial decisions must be made. One of the most difficult issues that spouses must resolve is the division of the marital estate. If spouses are unable to reach an agreement on their own or through a mediator, the courts will settle the matter by applying appropriate equitable distribution laws. These laws can become increasingly complicated, however, especially in cases involving couples of high net worth or complex assets. Also, there can be many exceptions to the general rules, so it is important that spouses are aware of and understand their rights.
Marital Property vs. Non-marital Property
One such exception applies to inheritance. Generally, any asset obtained by either spouse during the course of the marriage is classified as marital property and is therefore subject to division in the divorce. However, property acquired through inheritance is protected from equitable distribution provided the spouse who received the inheritance has taken the necessary steps to keep the inherited property separate from other marital funds. Below are a few ways that you can protect your inheritance from becoming subject to division in a divorce:
- Keep inherited funds in a separate account. Any money received through an inheritance should be placed in a separate account in your name only. This is critical. As soon as any inherited money becomes mixed with a joint account, or is used for the benefit of the marriage, it loses the characteristic of a non-marital asset and becomes subject to division. This includes any purchases made with the inherited money, such as a car or boat.
- Consider drafting a postnuptial agreement. If you do not have a prenuptial agreement, or if your prenuptial agreement does not include a provision for inheritance, then a postnuptial agreement may be a good option. If drafted properly, the agreement can effectively protect the inheritance as well as any increase in value.
- Beware of potential pitfalls. For example, if your spouse makes a contribution toward any inheritance tax, or if you pay the tax with marital funds, the courts could potentially consider the inheritance a jointly owned asset.
- If the inheritance includes real property, such as a house or farm, it is best to consult an attorney right away, as the laws regarding how these types of assets may be held are extremely complex, and any mistakes made along the way could be costly and irreparable.