Many individuals receive inheritances from parents, grandparents, or other loved ones during their lifetime. While an inheritance is often intended to benefit a particular family member, mistakes made after receiving inherited assets can create complications if a divorce occurs in the future.

Although the laws vary by state, inherited property is often considered separate property rather than marital property. However, there are actions an individual can take that may jeopardize the separate nature of an inheritance and increase the risk that all or part of it could be treated as marital property during a divorce.

Keep Inherited Funds in a Separate Account

One of the most important steps an individual can take is to maintain inherited funds in a separate account titled solely in their name.

When inherited money is deposited into a joint bank or investment account with a spouse, it can be difficult to distinguish inherited funds from marital assets. In many jurisdictions, this can create an argument that the inheritance was intended to be shared with the marriage, potentially transforming all or a portion of the inheritance into marital property.

Maintaining a separate account helps establish a clear paper trail showing that the funds originated from an inheritance and were not intended to be jointly owned.

Avoid Commingling Assets

Commingling occurs when separate property and marital property are mixed together. Once this happens, it may become difficult—or even impossible—to determine which funds belong to the inheritance and which funds belong to the marriage.

For example, if inherited funds are deposited into an account and marital earnings are later added to the same account, tracing the inherited portion may become challenging. Similarly, using inherited funds to pay ongoing marital expenses can complicate the characterization of those assets.

The more intertwined inherited funds become with marital finances, the greater the risk that a court may determine some or all of the inheritance has lost its separate character.

Be Careful With Inherited Real Estate

Inheritance issues are not limited to cash and investment accounts.

If an individual inherits a home, vacation property, farm, or other real estate, they should exercise caution before adding a spouse’s name to the title. Doing so may create a strong argument that the property was intended to be gifted to the marriage.

Even if the property was initially inherited by only one spouse, changing the title to include both spouses can result in what many courts refer to as transmutation—the process by which separate property becomes marital property.

Individuals should also be mindful when using marital funds to make significant improvements, renovations, or mortgage payments on inherited property, as these actions can create additional legal issues regarding ownership and reimbursement claims.

The Same Principle Applies to Other Property

The same concerns can arise with other inherited assets, including vehicles, boats, collectibles, artwork, jewelry, family businesses, and investment interests.

For example, if an individual inherits a vehicle and later adds a spouse’s name to the title, that action may be cited as evidence that the asset was intended to be jointly owned.

As a general rule, inherited property should remain titled solely in the name of the individual who received it if the goal is to preserve its separate character.

Consider a Postnuptial Agreement

Another option may be a postnuptial agreement. A properly drafted postnuptial agreement can clarify how inherited assets will be treated during the marriage and in the event of a divorce.

Such agreements can help reduce uncertainty and may prevent costly litigation regarding whether inherited property should be classified as separate or marital.

Individuals considering a postnuptial agreement should consult with qualified legal counsel to determine whether this approach is appropriate under the laws of their state.

Documentation Matters

Keeping good records is often critical when attempting to establish that an asset is separate property.

Individuals should retain inheritance documents, probate records, account statements, deeds, titles, and other records demonstrating how the inheritance was received and maintained. Detailed documentation can be invaluable if questions arise years later regarding the ownership of inherited assets.

Final Thoughts

An inheritance is often intended to benefit a particular individual and may represent a lifetime of savings by a loved one. While inherited property is frequently treated as separate property, that protection can be weakened if inherited assets are commingled with marital property or retitled in a manner suggesting joint ownership.

By maintaining inherited assets separately, avoiding commingling, keeping titles in the recipient’s name, and considering a postnuptial agreement when appropriate, individuals may be better positioned to preserve the separate nature of an inheritance in the event of a divorce.

If you need help with a divorce where there is inheritance, Stange Law Firm can help. Contact us online or 855-805-0595.