Shared finances and property in a marriage can be confusing, and these concepts become even more complicated during a divorce. After the court grants a divorce, the couple’s assets must be divided between each of them.
However, not all property is eligible for distribution to both parties, as not all assets are marital property. Those that are deemed marital property are either distributed equally or equitably, depending on the state.
If you’re in line for an inheritance, you’ve probably wondered if your inherited money is considered a marital asset. With such a large sum of money at stake, it makes sense that you’d want to know if your spouse has any right to it, especially if you’re in the process of filing for divorce.
Through this informative guide, you’ll learn about the relationship between inheritance and marriage and whether your inheritance is considered marital property.
Difference Between Community Property and Separate Property
There are two primary types of property in a marriage — community property and separate property. Before you can understand which applies to your inheritance, you must first know the difference between the two.
What Is Community Property?
Most assets obtained within marriage are community property. Community property, also known as marital property, denotes assets that belong to both partners in a marriage. This distinction includes any income, real property or personal property acquired by either spouse. Under the community property law, married individuals own all assets equally, regardless of who earns the income.
Community property includes all of the following assets:
- All items purchased with money earned by either spouse during the marriage
- All debts accumulated during the marriage, even if only one spouse signed the paperwork
- All income either spouse earned during the marriage
- Separate property that’s intermingled with community property to the point where it cannot be divided up
What Is Separate Property?
Separate property, sometimes called individual property, is owned by only one spouse and will not be divvied up during divorce proceedings. This type of property includes assets like funds, investments and other possessions an individual owns independently. Separate property primarily consists of assets and debts that an individual owned before they married their spouse, with few exceptions.
Though separate property rules vary by state, most of them are generally pretty consistent with one another. Typically, the following assets are separate property:
- Property owned by one spouse before the marriage
- Money held by one spouse before marrying
- Gifts that one spouse received before or during the marriage
- Property obtained by one spouse under their own name during the marriage and not used for the benefit of the marriage or the other spouse
- Debts or property that both parties agreed to as separate in a legal contract
- Personal injury awards for pain and suffering
- Any property acquired by one spouse using their separate property assets with an intention to keep it separate
Is Inheritance Considered Community Property or Separate Property?
Though most property that an individual obtains during a marriage is considered community property, inheritance is one of the few exceptions to this rule. Because inheritances are generally considered separate property belonging to the person who received them, they are not subject to equitable distribution and may not be divided between spousal parties during a divorce. That means your spouse is not entitled to your inheritance regardless of whether you received it before or during your marriage.
While it’s entirely possible to maintain separate ownership of an inheritance, there are also instances where inherited money could be community property according to inheritance and marriage rules. There are two instances in which your inheritance may be jointly owned by you and your spouse — commingling and transmutation.
Commingling describes when separate property and community property become mixed together. These assets are jointly owned by both partners in a marriage and are available for both parties to use, meaning the couple can use them to pay expenses incurred by either partner. That means if one spouse commingles their inheritance with marital property, their partner may have a claim to it.
For example, if you deposit a cash inheritance into a joint checking account that both you and your spouse use, the inherited money becomes commingled and may be considered jointly owned if you were to get divorced.
Transmutation is when an asset’s status changes from separate to community. For example, when separate property is retitled in the names of both spouses, it undergoes transmutation and becomes marital property. Likewise, inherited money used to purchase jointly owned assets with a spouse is also subject to transmutation.
Commingling and transmutation are directly related but not the same. Commingling is when separate property and marital assets become combined, while transmutation is the intent behind mixing them. An inheritance becomes transmuted when the intent of commingling it was for it to become a marital asset. In short, commingling doesn’t necessarily change the ownership of separate property, while transmutation does.
The good news is that some courts will accept commingled inheritance assets as separate if you can demonstrate that you never intended to share the money, in which case, the assets will not be transmuted. While this contest requires a high burden of proof, it’s possible with the right attorney on your side.
For example, if you deposited your inheritance into a joint account for the sake of convenience and your spouse was aware of this reasoning, the inheritance would remain separate due to the intent of the transfer.
Tips for Maintaining an Inheritance in a Marriage
If you’re an heir to an inheritance and wish to keep it separate from your spouse, there are various ways you can do so. When managing an inheritance in a marriage, be sure to keep the following tips in mind:
- Sign a prenuptial or postnuptial agreement detailing if and how you will divide your inheritance.
- Keep detailed records proving your inheritance was intended solely for you.
- Place your inheritance in a trust with yourself or your children as the beneficiary.
- Keep your inheritance money in a separate account in your name.
- Do not use your inheritance money to buy jointly owned assets.
- Do not use your inheritance money to pay off joint debt.
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