Receiving an inheritance from a friend or family member gives you greater financial freedom – something that carries a significant benefit if you are in the process of divorcing your spouse. Depending on your state laws and what you do with your inheritance, the court may require that you share a portion of the inheritance money with your spouse.
Common Law States and Property Division
Most states are “common law” states. These states take ownership into consideration when dividing assets in a divorce. Common law states generally categorize assets as either separate or marital property. Separate property includes assets owned individually by each spouse, and marital property encompasses all jointly owned assets. Although state laws differ, common law states generally classify inherited assets as separate property – preventing you from having to share your inheritance with your spouse.
How Community Property States Treat Inherited Assets
Unlike common law states, community property states define marital property as any asset you or your spouse acquired during the marriage. This is the case regardless of which spouse actually earned or purchased the asset. There are nine community property states in the U.S. While each community property state follows the same basic property division guidelines, all have additional regulations in place that govern the division of inherited assets in a divorce. California, for example, considers inherited funds separate property. Thus, the spouse that originally inherited the money gets to keep the entire sum in the divorce.
Co-mingling of Separate and Marital Property
If your inheritance is classified as separate property, take caution not to co-mingle the funds with marital property. Doing so could cost you a portion of your inheritance if you and your spouse divorce. Joint bank account deposits are a common method of co-mingling funds. If you deposit your inheritance into a joint bank account that you share with your spouse, the funds are co-mingled.
Co-mingling does not automatically strip your inheritance of its status as separate property, but you must be able to provide the court with a deposit record demonstrating exactly how much you deposited. If you cannot prove that the co-mingled funds contain your inheritance, the court may award a portion of your inheritance to your spouse in the divorce.
Asset Conversion and Your Inheritance
You are free to convert your inheritance without losing it in a divorce. For example, if you inherited a home from a family member and you sell the home, the sale converts the real estate into cash. The cash you receive from the home sale has the same protection under the law as the home you originally inherited. The reverse is also true. If your spouse has a valid legal claim on a portion of your inheritance, converting that inheritance will not protect it.
If your state laws dictate that money you inherited over the course of your marriage constitutes marital property, a judge is likely to award a portion of those assets to your spouse in a divorce. Hiding assets during divorce is a form of fraud and carries severe consequences. Thus, if the judge orders you to turn over a portion of your inheritance to your spouse, you have little choice but to do so. Freedom, after all, comes at a price.