Protecting Inheritance

Protecting Inheritance

Generally, inheritance is the sole and separate property of the inheritor so long as proper steps are taken to keep it separate from marital assets and not titled in the spouse’s name.

To be safe from division in divorce, inherited accounts or property should only be titled in the recipient spouse’s name, not jointly with their spouse. The advice from divorce lawyers often conflicets with estate planners. If the inherited property is not handled properly, separate property held by one spouse may become marital property subject to division with the other spouse. If inherited property is commingled with marital assets or jointly titled with the other spouse’s name, it becomes more difficult to award the sole inheritor the property upon divorce.

 

Caution must be taken in situations such as the following:

  • When a couple buys a new home using one spouse’s previously inherited assets as a down payment and titles it in both parties’ names, the home can be classified as marital property subject to division upon divorce without the reimbursement of the inherited funds. A pre-nuptial agreement, post-nuptial agreement or a trust holding title may protect the inherited sums, ensuring their return to the person who inherited.
  • The same holds true for any investments purchased with separate assets. Taking title in both the husband and wife’s names or commingling with other marital funds may result in those funds being divided between the spouses in the event of divorce. The mere Pay on Death (POD) designation should not grant marital property interest.
  • A more difficult scenario arises when a party to divorce inherits property that required personal efforts or an infusion of cash to maintain. As a married couple, income earned during the marriage typically becomes marital property if contributed from a spouse’s personal efforts. If marital income, assets or personal efforts are used to maintain or improve an inherited property, then reimbursement to the marital estate from a non-marital estate may be required to compensate for the value of the contribution by the marital assets, income or the personal efforts of either spouse. An example of this is with inherited rental property. The divorcing couple used marital funds to replace the furnace, and both parties contributed to the upkeep of the property and made improvements. However, the spouses were not reasonably compensated for these efforts. The marital estate may be entitled to reimbursement for the cost of the furnace as well as for reasonable compensation of their efforts from the non-marital estate.

 

Rather than transferring inherited assets outright, a trust can be established to transfer wealth and potentially protect these assets in the event of a divorce. When assets are owned by a trust, they are not owned directly by the spouse. This makes it more difficult for a divorcing spouse to pursue the trust because it is, by definition, separate from any marital asset.

 

Trust assets acquired by inheritance or gift, before or during the marriage, are generally recognized as separate property not subject to division upon divorce.

 

While a former spouse may not be awarded non-marital property (generally property acquired prior to the marriage or by gift or inheritance), the property or income earned from the property may be considered in determining an award of spousal support, child support or child related expenses, including college.

 

A trust that limits access to assets or income may be beneficial in limiting a support award.

 

Often as part of an estate plan, a parent may sell stock or transfer a partnership interest in a family owned business to their child(ren). In this situation, care must be taken to ensure that marital assets or income earned from personal efforts are not utilized to fund the purchase if the goal is to keep the business in the family. Utilizing income the child may have from investments, including distributions from the business over and above the child’s employment income, may be used safely if done properly.

 

Inherited property must be strategically protected. Make sure you consult with a family law attorney who is educated and knowledgeable regarding these complex issues.

 

Your attorneys at Feinberg Sharma, P.C. are able to properly advise and guide you through such issues, whether you are preparing to marry, wishing to protect anticipated inheritance in an existing marriage, or anticipating divorce.

 

© 2018 Jennifer S. Tier for Feinberg Sharma, P.C.