A more complex legal analysis is required when a spouse receives a gift or an inheritance and then mixes the proceeds of the gift or inheritance with marital funds (“co-mingling”) or uses the gift or inheritance to purchase something for the family, such as a family vacation or to remodel the marital residence (“donative intent”).
“Co-mingling.” Assume that three years into your marriage, you inherit $30,000. You open a money market account, title it in your name only, and fund it solely with your $30,000 inheritance. Five years later, you leave the employment that you began one year after marriage. Upon leaving your employment, you have your 401(k) rolled over into an IRA. To simplify your accounts, you decide to close out the money market account that was funded with your inheritance and deposit the proceeds into your new IRA. For the next few years you make additional contributions to your IRA from your earnings. Marital property law considers the earnings of either spouse to be a marital asset. Therefore, the funds from the 401(k) from your former employer and the additional contributions you made to your IRA from your earnings are all considered marital funds thereby making the IRA a marital asset subject to division at divorce. Six years later, your spouse files for a divorce. You would like to subtract the value from the money market account that was mixed (“co-mingled”) from the value of your IRA before determining the value of the IRA for purposes of a marital property division. However, due to market fluctuations, it is difficult to determine how much the original $30,000 inheritance is worth today. The simplest solution for the court is to find that the inherited assets have been so co-mingled with the marital assets, that the entire balance of your IRA is considered marital and subject to division in the divorce. However, if you had simply deposited the inheritance into the money market account and made no further contributions to the account, the inherited asset would remain your individual property, and except in limited circumstances, would not be subject to division in the divorce action.
“Donative Intent.” Imagine that you have been married for ten years. You and your spouse purchased a home two years into your marriage. After eight years of living in your residence, you inherit $40,000. You deposit the $40,000 into a joint checking account until you determine how you want to spend the proceeds. After four months, you decide to spend $25,000 of the inheritance to remodel the marital residence. You then decide to spend the remaining balance on a family vacation. Three years later, your spouse files for divorce. You would like the court to give you credit against the marital property division for the $40,000 that you inherited three years earlier. However, the easy response for the court is to determine that your actions in using your inheritance to remodel the marital residence and for a family vacation demonstrated an intent to “donate” the proceeds of your inheritance for a marital purpose, and you will likely receive little to no credit against the property division.
With this in mind, what can you do to protect a gift or inheritance you receive from being divided as part of the marital estate in the event of a divorce? The safest thing is to take the proceeds from the inheritance and deposit them into a newly-created account (such as checking, savings, money market, or investment account) that is in your name only. Then, do not make any additional deposits into this account from the earnings of you or your spouse, or from any other accounts or assets in either your name or your spouse’s name that have been funded in part or in whole by the earnings of you or your spouse. This will avoid the potential claim that the individual inherited assets have been so co-mingled with marital assets that the court cannot determine what portion of the asset remains individual.
If you would like to use part of your inheritance for a home remodel or a family vacation, but not risk losing the individual nature of the entire inheritance, simply withdraw the amount you would like to contribute or “donate” toward the marital purchase, and leave the balance in the individual account that was funded by your inheritance. Then, in the event that you and your spouse subsequently divorce, you have only risked losing that portion of the inheritance that you chose to “donate” to the family, and the balance should be secured as an individual asset and, therefore, not considered in the property division at the time of the divorce.
The information provided in this article is a simple overview of property division at the time of divorce in relation to inheritances. There are a number of factors that the court must consider when determining how to divide your assets in the event of a divorce which could result in costly divorce litigation and the loss of your inheritance. Therefore, should you receive an inheritance and wish to protect the individual nature of the inheritance, you should consult with a family law attorney to review your specific situation prior to making any decisions about what to do with your inheritance.