An inheritance can be a substantial asset—especially if you're lucky enough to inherit a house or other real estate. But if you're facing a divorce, you might have a number of questions. Will you have to split any inherited assets with your spouse in the divorce? Are there any steps you can take to prevent your ex from getting the assets?
The answers to those (and other) questions will depend on where you live, as well as your specific circumstances. But here's a general overview of the rules on inheritance and divorce.
State laws determine how property is divided in divorce. Depending on where you live, the first question is whether an inheritance is considered your separate property or marital property? That's because, in most states, only marital property will be divided between the spouses when they get divorced. They usually get to keep their own separate property.
Unfortunately, there's no simple answer to the question of whether an inheritance is marital property subject to division (or "distribution") in a divorce. As with so many things in the law, it depends—on your state's laws and on your individual circumstances.
If you're worried about whether your spouse is entitled to your inheritance, the good news is that the vast majority of states view an inheritance as separate property. That's true no matter when you inherited the money or other assets—before you married, during your marriage, or after you were divorced. Unless you live in one of the states that allow judges to include separate property when they're dividing a divorcing couple's assets, that means you won't have to split the inheritance with your spouse.
But here's the thing—unless you're careful, what you do with your inherited assets during your marriage can change that outcome.
Even when an inheritance is initially considered separate property, you can convert it into marital property. In the law, this is known as—brace yourself—"transmutation of property." Sometimes transmutation results from something you did intentionally. Let's say your parents left you a house. Being the devoted, generous person you are, you put your spouse's name on the deed. You both move into the house, sharing costs as you would likely do with any family home. But then your marriage goes south, a divorce is in progress, and you want the house excluded from the property division, claiming you never intended it to be marital property. Good luck selling that argument to a judge.
But even if you never put your spouse's name on the deed, there are certain situations in which your spouse might be entitled to some of the house's value. The most common scenario for this would be when you and your spouse used marital funds to pay for improvements on the house. Although the house itself might still be considered your separate property, the laws in your state may consider any increase in the house's value that is a result of those improvements (rather than a result of a general increase in property values over time) to be marital property that is subject to division in divorce.
The most common example of converting an inheritance to marital property is when inherited money is "commingled" (mixed) with marital assets. For example, your favorite aunt passes away and leaves you $20,000 in her will. You then put the money in an existing savings account that you and your spouse jointly own, and that you both have access to. If it was your intention to share the inheritance with your spouse, no problem. But if you put it in the account assuming it would still be exclusively yours . . . well, you know what they say about assuming. The reality is you've probably converted the inheritance into marital property.
Obviously, the lesson to be learned here is that if you don't want your spouse to get any of your inheritance in a divorce, take every precaution to keep it separate and apart from any joint accounts. And don't do anything that could reasonably be construed as an intention to share it with your spouse. If you're not sure what to do, consider consulting with a divorce attorney who knows the laws in your state.
Especially in the current real estate market, some couples are only able to buy a house when one spouse inherits a chunk of money and uses it for the down payment. They then take title together, move in, and use marital funds to pay the mortgage. If you've done something like this—contributed inherited money to purchase marital property—is the inheritance automatically converted from separate property into marital property? Not necessarily. The laws in some states allow you to get a reimbursement for the amount you contributed when the marital property is divided in divorce.
Once you're divorced, any property you acquire—including an inheritance—is ordinarily yours alone—unless your divorce judgment or divorce settlement agreement specifically provides otherwise. In some states (like California), the same is true for property you acquire after you and your spouse separate but before you're divorced.
However, depending on the laws in your state, a post-divorce inheritance could conceivably affect the amount of child support or alimony (known as spousal support or maintenance in some states) being paid under a divorce judgment. As a general rule, parents who are receiving support payments for their children may go back to the judge and request a change (or "modification") in child support if the circumstances have significantly changed since the divorce. Although temporary changes usually don't count, a judge might increase support levels when a large inheritance has increased the other parent's ability to pay support—especially if the amount was below the state's child support guideline.
When it comes to changes in alimony, many settlement agreements and divorce judgments include provisions that say exactly when spousal support may be modified—or that it's "nonmodifiable." And some states don't allow any modifications in alimony. If your agreement, order, or state law doesn't rule it out, you may request a modification in maintenance payments based on significantly changed circumstances—for instance, if you've been paying alimony to an ex who no longer needs the support after receiving a large inheritance.
More and more couples are using prenuptial agreements (also known as "antenuptial agreements" or "premarital agreements") to protect assets they've accumulated before they got married. You see this a lot with second marriages, where the spouses tend to be older and want to protect assets they plan to leave to their children.
A prenuptial agreement (prenup) is a contract, legally obligating the couple to abide by its terms. The beauty of a prenup is that it takes the guesswork out of what will happen down the road to the assets addressed in the agreement, including an inheritance. Additionally, prenups often take precedence over state divorce laws on many issues. But here's a caveat: There are very strict rules governing the validity of prenups, so your best bet is to consult a knowledgeable divorce attorney to help you draft or review one.
If your state allows it, you may also enter into a postnuptial agreement. This is similar to a prenup except, as the name implies, you and your spouse reach the agreement at some point after you got married.
Also, if you're concerned about the effect of a post-divorce inheritance, you can include language in your divorce settlement agreement to specifically address that issue.