Wedding vows often include the words “for richer or poorer,” and married couples often live by the principle that “what’s mine is yours.” Income goes into a joint checking account; spouses have joint credit cards. In fact, for most couples, it would feel strange not to share income and assets with each other. But when it comes to inheritance and divorce, sharing can get you into trouble.
We’re not saying that you and your spouse should keep all of your assets separate, nor that people should manage their assets during marriage with the expectation that they might divorce. However, if you expect to receive an inheritance, and you would not want your spouse taking at least part of it in a divorce, it’s important to think ahead. By the time you are divorcing, your options may be limited.
Everyone knows that in a divorce, the spouses split up their property. In Maryland, Virginia, and most other states, property in a divorce is divided by “equitable distribution.” In a nutshell, if the spouses cannot reach their own agreement about how to divide their property, the court will divide marital property in a way that it finds fair and equitable.
So far, so good. But what exactly is “marital” property? Is it all property that the spouses own? Generally, no. Marital property is property that either spouse has acquired during the marriage, with limited exceptions. One of those exceptions in Maryland, the District of Columbia, and Virginia, is inherited property. An inheritance, even one received during the marriage, is usually considered “separate property” that is not subject to division in divorce. So what’s the problem?
The problem is that separate property can easily become marital property in the eyes of a court. It happens through a process called “commingling.” Separate property can easily become commingled with marital property, and when it does, it’s vulnerable in a divorce.
Let’s say that Stacy and Chris are a married couple. Chris’s Aunt Esther passes away and, having no spouse or children, leaves her estate worth $100,000 to Chris. Chris, who doesn’t need most of Aunt Esther’s belongings, keeps a few mementos and sells the rest. Stacy and Chris had been planning to buy a house, and Chris is happy to contribute the proceeds of the inheritance so that they can buy a better one than they had originally planned. They do so, with both spouses on the deed to the property.
Unfortunately, several years later, Stacy and Chris decide to divorce. If Chris demands the $100,000 back out of the marital estate, a judge will almost certainly refuse on the grounds that the property has been commingled.
Another common way for an inheritance to become commingled with marital property is for the proceeds of an inheritance to be deposited in a joint bank account. If Stacy’s father passes away and leaves Stacy $50,000, that money can become marital property once it is deposited in Stacy and Chris’s joint bank account.
How do you keep an inheritance from becoming marital property? There are two primary ways: avoid commingling the inherited property with marital assets, or have a prenuptial agreement or postnuptial agreement in place.
Let’s consider how Stacy and Chris in our example above might have handled things differently if they wanted to keep their inheritances separate. In the first example, they might have signed an agreement that in the event of divorce, Chris would be entitled to an additional $100,000 (and possibly a portion of the appreciation related to that amount) out of the marital estate in recognition of the contribution to the purchase of their marital home.
In the second example, the $50,000 Stacy inherited could have been placed in a separate account in Stacy’s name only. If the money never goes in a joint or otherwise marital account, and no marital money is deposited into Stacy’s separate inheritance account, it never gets commingled. In the event of a divorce, the origins of the funds are easy to trace, and it is unlikely that a judge would rule that it was marital property.
Of course, these are just examples. In real life, it’s difficult to have a conversation with your spouse along the lines of, “I’ve come into a large inheritance, but I’m keeping it away from you in case we divorce.” That’s why it is best to be proactive when thinking about inheritance and divorce. It is much easier to decide how a situation should be handled when it is future and hypothetical than when it is real and demands immediate resolution.
If you are not yet married, or married but have not yet received an inheritance, now is the time to talk to your partner or spouse about how you plan to handle any future inheritances. This is the type of situation for which prenuptial agreements (or postnuptial agreements) were designed. Both of you can discuss your finances openly and decide how you want to handle inherited assets during your marriage and in the event of divorce. Then, when one of you eventually receives an inheritance, you don’t have to make the decision; you’ve made it already.
If you don’t want to make a prenup or postnup, perhaps you can influence the form in which you receive your inheritance. If the inheritance you expect is from a parent, you may be able to ask them to create a trust in your name so that any inheritance remains in trust for your benefit rather than being distributed directly to you at your parent’s death.
Of course, you may only be thinking about inheritance and divorce because you expect to get divorced soon. In that case, your best course of action is to hire a creative, strategic divorce attorney with a track record of experience litigating property division in divorce. If you have questions about divorce and inheritance, we invite you to contact Strickler, Platnick & Hatfield to schedule a consultation.