People contemplating divorce often wonder if inheritance is considered a martial asset and it is a good question. At some point during a marriage it is not uncommon for one or both spouses to inherit money or property from a relative who has passed away. The issue of classifying the property as a martial property subject to division or a separate property that is not subject to division can be a tricky one, with several factors to consider. Read on to learn more about whether or not inherited property is a marital asset.
Key Takeaways
- Inherited property is generally considered separate property unless it is commingled with marital assets, at which point it may be subject to division in a divorce.
- To maintain the separate status of inherited property, it should be kept in a separate account and not used for marital expenses or improvements.
- Pre-nuptial agreements and clear documentation, such as donative intent letters, can help ensure that inherited property remains separate and not subject to division in a divorce.
What is the Martial Estate?
In order to understand how property is classified when the court is looking at division, you need to understand what the marital estate is. Any money, property or debt acquired during the course of the marriage can usually be viewed as marital, with certain exceptions discussed later in this article. When two people decide to divorce, the marital assets and debts are listed and, if the parties cannot come to their own agreement on how to split the assets and debts, divided by the court. Assets and or debts acquired before the marriage or subject to a pre-nuptial agreement can be exempted from division because they are either not marital or they are subject to the pre-nuptial agreement terms.
What is Separate Property?
When the court is considering the division of assets the court will examine the status of the property. Typically, anything acquired during a marriage is considered a martial asset or debt, with some exceptions.
The asset came to one of the spouses through gift, will or devise:
- a gift given to just one spouse by anyone is considered separate property, an example of this would be a car or a house or a check made out to the spouse alone
- by will/devise means that one spouse is a named heir in a last will and testament and any money or property distributed from the estate is the spouse’s separate property
- by decent is when a family member of one spouse passes away without a will and the money or property passes to the spouse via the laws governing intestacy, since the spouse is a blood relative of the deceased party, some money or property may be given to them so that the money or property does not escheat to the state.
Separate property can also remain separate property by not co-mingling it with marital property. For example, if one spouse owns a house prior to the marriage, it can remain separate as long as the other spouse is never added to any ownership documents or puts any money into the house.
What is Comingling?
Comingling is when an asset that is originally separate gets “mixed in” with a marital asset. An example would be if one spouse inherits $100,000 from a relative who passes away. The spouse then puts the funds into a renovation project on the marital home. The assets are now comingled and they can be “backed out” but it can be a long and tedious process in the middle of a divorce and dive divorce costs up.
Inherited Money:
So as explained above, inherited money (by will or devise) is separate property. When the inherited money is comingled is when issues can arise in a divorce proceeding. The best way to avoid making the separate property marital is to keep it in a separate bank account and don’t use it for marital expenses or assets. If you do choose to comingle, you need to understand that the money may no longer be viewed as separate by the court and extra steps may need to be taken to back it out of the asset or it may just be gone into the marital estate for good.
Life Insurance:
If one spouse is a named beneficiary on a life insurance policy then it is only that spouse, not the marital estate. For example, let us say that one spouse’s parent named that spouse as a beneficiary on a life insurance policy and then passes away, the payout is only to that named spouse, it is not marital property. On the other hand, the argument could be made that the unnamed spouse could benefit from any tax breaks on the proceeds of the life insurance policy. The best bet when considering if you should name one spouse, and one spouse only, as the beneficiary for a life insurance policy would be to write a donative intent letter, explaining that the life insurance policy payout is meant as a gift to just one spouse, clearly placing the payout in the separate property category and cutting off any future litigation where the other spouse claims it is marital property.
Sale of a home:
The proceeds from the sale of a home that is separate property should, reasonably remain separate property. If the spouse who receives the sale proceeds of a home take precautions to ensure that the proceeds are not comingled with martial accounts or assets. If the spouse who receives the proceeds deposits them in a jointly held account or uses the proceeds to pay off marital debt or purchase assets that could be considered marital, the separate property could then be claimed as marital and subject to division in the event of a divorce.
The bottom line:
The takeaway here is that if you own separate property that you want to remain separate in the event of a divorce you should hire an experienced attorney to draft a pre-nuptial agreement. If you inherit or are gifted money or property that you want to remain separate property you must keep it completely separate from any martial account or asset so that no argument could be made in court that the property is subject to division. The martial estate is not automatically entitled to the separate assets of either spouse and taking steps to ensure the boundaries between separate property and martial property are crystal clear are essential to avoiding a court battle that will deplete the estate. IF close family members have you named as a beneficiary or heir apparent, you can speak to them about clarifying that you are the only intended recipient if and when you plan to marry. A little preplanning can go a long way in preventing unnecessary stress and legal fees down the road in the event of a divorce.
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