Imagine this scenario: You receive a significant inheritance from a relative during your marriage and use the financial windfall to pay off debts, make home improvements, and invest in your future.
However, a few years later, your marriage ends in divorce, and suddenly, you're faced with whether your inheritance is considered marital property.
Divorce is a complicated process even in the best of circumstances, and the question of dividing assets can make a difficult situation worse. One of the most contentious issues in a divorce is determining whether an inheritance received during the marriage is considered marital property or separate property. This scenario is not uncommon, and it's essential to understand the nuances of the issue as it will have significant implications for the distribution of assets during the settlement
So, when does an inheritance become marital property? We will explore the subject in more detail and provide a clear understanding of how inheritance is handled during a divorce settlement.
Is inheritance marital property?
One of the most common questions I receive is, "Is my spouse entitled to my inheritance money?"
The answer to this question is not straightforward, as it depends on several factors, including the timing and use of the inheritance and the laws of the state where the divorce occurs. Even if the inheritance is in your name, it may not be fully yours due to state laws that may classify it as marital property.
In general, if the inheritance was kept separate from other marital assets and not commingled with joint accounts, it is likely to be considered separate property and not subject to division. This means that the spouse who received the inheritance has sole ownership of it, and it can be excluded from the division of assets during the divorce settlement.
However, if the inheritance was used for the benefit of both spouses (e.g., paying for household expenses) or commingled with other marital assets, it may be considered marital property and subject to division during a divorce. This means that the spouse who received the inheritance may not have sole ownership of it and may be required to share it with their spouse during the settlement process.
It's important to note that laws regarding inheritance and divorce vary from state to state. Some states have extreme community property laws that require the division of all marital assets, including inheritances, equally between spouses. Other states use equitable distribution, which means that assets are divided lawfully but not necessarily equally. It's essential to understand the laws in your state and work with a Certified Divorce Financial Analyst® (CDFA®) who is familiar with the guidelines to protect your interests.
Can separate property become community property?
In some cases, separate property can become community property.
Community property refers to assets that are owned jointly by the couple. California state law operates under the community property presumption, meaning any property acquired during a marriage and before the date of physical separation is presumed to belong to the community.
Meanwhile, separate property is generally defined as property that belongs only to the individual, even if they are married. While laws vary from state to state, a property is generally considered separate if:
- It was acquired by one spouse before the marriage;
- It was received by one spouse as a gift or inheritance, before or after the marriage;
- It was legally defined as separate by means of a prenuptial agreement;
- It was acquired during the marriage, but proper legal steps were taken to ensure separate status.
One common way separate property can become community property is through the process of commingling. Commingling occurs when separate property is mixed with community property, making it difficult to distinguish between the two. For example, if one spouse inherits a large sum of money before the marriage and then deposits it into a joint bank account, it may become community property, and both spouses may have a claim to it.
Another way separate property can become community property is through the process of transmutation. Transmutation occurs when separate property is intentionally converted to community property through a written agreement, such as a prenuptial or postnuptial agreement.
How do I protect my inheritance from divorce?
If you're concerned about protecting your inheritance from divorce, there are steps you can take to ensure that your inheritance remains separate property and is not subject to division during a divorce. Here are some tips:
- Keep it separate: The most important thing you can do to protect your inheritance is to keep it separate from any community property. You should not commingle the inheritance with any joint bank accounts or use it to pay for joint expenses. Instead, keep the inheritance in a separate account or invest it in separate property.
- Keep documentation: Safeguard all documentation showing that the inheritance is separate property. This might include bank statements, wills, trusts, or other legal documents that show that the inheritance was specifically given to you and not intended to be shared with your spouse. Keep detailed records of any transactions and keep the inheritance separate as much as possible.
- Get legal advice: If you're concerned about protecting your inheritance, it's important to seek legal advice from an experienced attorney. They can help you understand your rights and develop a strategy to protect your interests during a divorce.
- Get a prenuptial or postnuptial agreement: If you want to protect your inheritance (and other assets you may have), you may want to draw up a prenuptial or postnuptial agreement. A prenuptial agreement is a legal contract created between two people before they are married, whereas a postnuptial agreement is created after the couple has already tied the knot. Both types of agreements serve a similar purpose, which is to determine how assets and liabilities will be divided in the event of divorce or separation.
What does California's inheritance law say?
California is a community property state, which means that any property acquired during the marriage is generally considered community property and subject to division during a divorce. However, there are exceptions to this rule, including inheritance.
Under California law, inheritance is generally considered separate property if it is received by one spouse before or during the marriage, but only if it was kept separate from community property and not commingled. This means that if one spouse inherits money or property before or during the marriage, keeps it in a separate account, or uses it only for their benefit, it is likely to be considered separate property and not subject to division during a divorce.
However, if the inheritance is used for the benefit of both spouses or commingled with community property, it may be considered community property and subject to division during a divorce. For example, if one spouse inherits money and uses it to make a down payment on a marital home, the inheritance may be considered community property because it was used for the benefit of both spouses.
What happens to property owned before marriage in California?
In California, property owned before marriage is generally considered separate property and not subject to division during a divorce. This means that if you own property before getting married and you keep it separate from any community property acquired during the marriage, it remains your separate property even after divorce.
However, separate property can become community property under certain circumstances. For example, if you started depositing funds earned during a marriage into a bank account that existed prior to the marriage, all of the funds (even those earned prior to the marriage) can become subject to division during a divorce. Additionally, if separate property is used for the benefit of both spouses or transmuted into community property through a written agreement, such as a prenuptial or postnuptial agreement. In that case, it may also be subject to division during a divorce.
If you're getting married and you own property that you want to keep as separate, it's important to take steps to ensure that it remains separate. For example, keep separate bank accounts or title the property in your name only. Additionally, consider entering into a prenuptial agreement that specifies how separate property will be handled in the event of a divorce.
Work with a Certified Divorce Financial Analyst®
Laws around property division in divorce can be complicated, and the best way to protect your inheritance is to be proactive. If you are concerned about the status of your inheritance, talk to a Certified Divorce Financial Analyst® (CDFA®) as soon as possible.
With their deep financial knowledge, a CDFA® can determine if your inheritance is subject to division during a divorce. They can also take steps to protect your financial interests during the divorce process and create a sustainable post-divorce plan that allows you to move forward with clarity and confidence.
Have any questions? Unsure about your next steps? Book a consultation today.