Keeping Inherited Assets in Divorce

When a marriage ends in divorce, perspectives shift as to who owns what.  At this point, it may be too late to keep inherited assets such as vacation homes, rare collections and other gifts, even if those assets were never intended to go to your former partner.

What is considered separate versus marital property can vary, depending upon the state in which a couple resides.  “Kitchen-sink” states such as Vermont, Michigan, Massachusetts and Connecticut, for example, typically do not distinguish between separate and marital property.  “You may be able to walk away with that rink your grandmother gave you, but the value of the asset will be considered in the division of property.” 

Although the financial outcome of a divorce may come down to where you live, there are some things that can be done to help sway the outcome in your favor, especially when it comes to inheritances.

• Negotiate a Prenup. Prenuptial and postnuptial agreements can help shield assets such as inherited businesses, money, property, or rare art collections if a couple ends up in divorce.  The agreement can state that in the event of a divorce, each spouse will forgo his or her rights to any inheritance or major gift given to the other partner before or during the marriage. 
• Save Documents. People should keep any paperwork illustrating that an inheritance was only intended for one partner.  A copy of someone’s gift-tax return is especially useful for this purpose and a letter from the donor explaining for whom the funds were intended may help as well.  “Every state is different but the more you have to show, the better your claim.” 
• Maintain Separate Accounts. Couples should not commingle inherited money or other assets in an account that also includes the other spouse’s funds.  Instead, put it in a separate bank or investment account.  “If it’s separate then you avoid arguments unless it was gifted to the other spouse, as well.”
• Keep Titles in One Name. If couples do not have a prenup, the best way to protect separate assets is to avoid adding a partner’s name to the deed.  It is recommended to use the same strategy if a spouse receives a financial inheritance specifically to buy a second home or investment property during marriage.

See Matthew Hollister, How to Keep Your Inheritance in a Divorce, The Wall Street Journal, Nov. 9, 2014.