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How to Keep Your Inheritance Separate During a Divorce

Michael Tierney
December 4, 2022

The divorce process is an arduous and unpleasant situation where a marriage ends, and a new chapter of your life begins. While most people rail against divorce tooth and nail, some marriages become unsustainable to the point continued marriage causes more harm than good. Regardless of the circumstances surrounding your divorce, certain aspects of the process are inescapable without a prenuptial agreement.

The most significant component of divorce proceedings includes asset division negotiations. These talks help determine which real, financial, and personal assets go to which spouse following the divorce. Some assets are divided 50/50, while others are divided in favor of one spouse over the other. Typically, every asset in the relationship is considered for division though some assets might be more important to you than others.

One of the biggest points of contention in a divorce is the division of financial assets, especially in relationships where one spouse is the primary provider. While dividing your earnings from your profession is more or less inevitable, you might be less inclined to consider dividing inherited funds. The money you inherited is money that has significance to you since it came from a family member or close friend.

Solution Fortunately, inherited money is not given the same status as other funds and does not have to be divided during divorce. While inheritance money is usually placed in a trust or separate account, it is common for people to integrate those funds into their primary bank accounts. You will have to keep the funds separate to prevent the division of inherited funds.

What is Inheritance?

You might already know that inheritance is property received from a deceased relative who specified you in their last will. When people hear the word "inheritance," their minds go straight to a large sum of money deposited into an account. These funds can be significant deposits depending on the means of the decedent, but money is not the only property. Most wills cover the decedent's entire estate, including physical property and financial assets. While financial assets are the most common, the decedent can also list any of the following assets in their will:

  • Stocks
  • Bonds
  • Motor Vehicles
  • Jewelry
  • Art
  • Antiques

These physical assets usually have intrinsic value, making them important collectibles or valuable for resale. Once the property is in your possession, you can use it however you see fit. Depending on how old you were when the property was disbursed, you might not have access to it until you are 18. Regardless of the restrictions outlined in the will, the property you inherit is yours in every sense of the word.

Person Receiving an Inheritance

There is another detail about an inheritance that might impact your inheritance before a divorce becomes an issue. There are currently 6 states that enforce an inheritance tax that could take between 18% to 40% of inheritances valued over $12,000,000.00.

These states include:

  • New Jersey
  • Pennsylvania
  • Iowa
  • Maryland
  • Kentucky
  • Nebraska

While Iowa is planning to phase out its inheritance tax by 2025, there remain 5 states that will continue to enforce it. While certain state governments might be able to collect from your inheritance, you still are not obligated to divide the assets with your soon-to-be-ex. It is possible to keep inherited assets separate from your marital property, but there are certain steps you must take to be successful.

Otherwise, your inherited assets will be lumped in with your marital property and risk being divided with your spouse during the divorce negotiations. The biggest question is how to separate your inherited and marital assets.

How to Separate Inherited Finances

When a relative passes away and leaves us a substantial amount of money, you might be less inclined to share those funds with your spouse when going through a divorce. While this is understandable, you need to ensure that the inherited funds are not integrated into your shared assets if you want to protect your inheritance during a divorce.

Fortunately, separating your inheritance might be as simple as leaving it where it is once it falls under your ownership. Most inheritance money is deposited into an account opened by the decedent that is later transferred to your name upon their death. For example, if your grandmother leaves you $150,000.00, she will open a trust account, deposit the funds, and the ownership of the account transfers to you after she passes and you reach the prerequisite age.

Leaving the inherited funds in this account is one of the easiest ways to keep it safe since the account is 100% separate from your marital assets. Additionally, you maintain full control since the account transfers directly into your name rather than your spouse's name. If you want to remove the funds from the trust account, you will want to ensure the account it goes to is only in your name.

Separating Finances

If the funds are transferred into an account you share with your spouse, they will merge with your shared assets and be indistinguishable from them. Keeping the funds in a separate account in your name remains a separate entity you can easily distinguish from the other assets in the negotiation.

Inherited funds are seldom insignificant and might be the kind of money you want to hold onto at all costs. Since it is as simple as opening a new bank account to store the funds, keeping your inheritance separate from the money you share with your spouse should be no issue. The bigger challenge is when the property you inherit is not liquid finances but personal belongings. This kind of property requires a more hands-on approach that might protect this other type of inheritance from divorce negotiations.

How to Separate Physical Assets

As previously mentioned, inheritance is not limited to money and can include real estate, vehicles, artwork, etc. This type of property, while extremely valuable, is radically different from financial inheritance. Unlike money, you cannot put art or a car in a bank account like funds a recently passed relative gives you.

While this is a very different situation, it does not mean that you cannot protect inherited property similarly to financial inheritance. Like a separate bank account can be opened in your name rather than jointly, the property can be listed under your name alone. Inherited property is usually listed under a title of ownership, specifically property that requires registration or has significant value. These titles help confirm who the real owner is and who is the beneficiary of any insurance policy.

While the owner of a title can add other owners to the title, an inherited property is automatically transferred to the decedent's beneficiary. Title transfers vary based on the state, but inheriting property means the title originally in the decedent's name will be transferred to the beneficiary's name. From there, the beneficiary will be able to maintain complete ownership of the property or add another name to the title as they see fit. Typically, it is recommended that inherited property remains under the beneficiary's name in case of divorce. The reason is that non-monetary inheritance usually carries significant financial value.

Physical Asset Inheritance

For example, inheriting an antique piece of furniture could leave you with an item worth hundreds of thousands of dollars. The value of this furniture, once under your name and that of your spouse, will be factored into the divorce negotiations during asset division. Alternatively, when the inherited property remains under your name, it is generally considered separate property that your spouse has no claim to during the negotiation. As soon as your spouse's name is legally associated with an item, it becomes marital property, and your spouse has the right to negotiate ownership.

While keeping inherited property separate might seem easy, it is not always so simple. Sometimes, we have faith in the marriage, and the marriage ends anyway. When you have commingled your inheritance with marital property, it can be difficult to retain your claim to it once the divorce begins. Fortunately, it is possible to reassert your ownership over the inheritance with your spouse's assistance.

How to Separate Commingled Inheritance

When you have a strong marriage, it is common to trust that it will last and that you will never need to worry about your claim to inherited funds or property. This might drive you to add your spouse to the titles and deposit inherited funds into a shared bank account. While this sentiment is understandable and even admirable, it might backfire unless you have the resources to recover your claim.

Fortunately, there are ways you can maintain your independent claim to inherited property. Unfortunately, it requires a significant amount of paperwork and record-keeping to accomplish. The exact laws on how to do this vary, but in California, it is possible to create a trace on inherited funds and property. The 2 tools used in California law include:

  • Direct Tracing: A documented account of the separate property and the ways it was kept separate from marital property.
  • Family Expense Tracing: Property that cannot be directly traced and has been used for communal use for the family. What remains leftover remains separate property.

Essentially, a paper trail must be created tracing the history and use of the inherited property that confirms the decedent bequeathed the property to you before it was introduced to the marital property. Special provisions are also in place for when the inherited property is spent on communal purchases. For example, if you and your spouse decide to purchase a house and use inherited funds for the down payment, you have made a communal purchase with inherited property.

Commingled Inheritance Funds

While it might seem like those funds are permanently lost since you used them on a marital purchase, you can recover them. It is possible to have the inherited funds spent on a marital home reimbursed during the divorce process. This option is especially viable if your spouse ends up with custody of the marital home instead of you.

The biggest issue is that the options for recovering inherited property after it commingles with the marital property are extremely limited. Once inherited property commingles with marital property, it undergoes a process known as "transmutation of property." Typically, this process is irreversible unless you keep extensive records and have documents signed by your spouse confirming your right to the property.

Otherwise, the property cannot be recovered and remains communal property. The best course of action is to maintain the separation of inherited and personal property throughout the marriage and minimize its use in communal purchases.

Unfortunately, asset division is not the only concern during a divorce, as several other points of contention can arise in a contested divorce. The only way to protect yourself against some of the more complicated outcomes is to brush up on your divorce knowledge.

Learn the Law

Divorce is a highly unpleasant and complicated legal process that signifies the dissolution of your marriage. While the end of your union is unpleasant enough, having to protect property and funds bequeathed to you by a deceased relative only compounds the pain. Ultimately, the only effective way to fully protect inherited property is to keep it under accounts and titles in your name.

Sharing a title or bank account with your spouse instantly converts it to marital property unless your spouse signs an agreement specifying otherwise. Aside from this, property division is only one aspect worthy of consideration during divorce proceedings.

Signing For Inheritance

Divorce remains one of the most complicated and unpleasant civil proceedings and is something most couples fight viciously to avoid. While divorce is sometimes necessary, it is seldom an amicable process since divorce usually brings out the worst in couples. Sometimes, a spouse might resort to underhanded or otherwise cruel tactics to protect themselves from the possible loss of rights and assets during divorce.

The best way to protect your interests is to learn more about divorce so you can be prepared for any scenario. We realize this is an unfortunate and emotionally turbulent situation for you, but we hope this article was helpful.

If you ever have any additional questions about the divorce process, we're here to help. Feel free to leave a comment down below or contact us directly, and we'll assist you however we can.

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Written By:
Michael Tierney

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