Divvying Up Inherited Assets In A Divorce

Property settlements in divorce proceedings

A property settlement is an agreement entered into by divorcing spouses. Its purpose is to provide an equitable and agreed division of their assets between them. The agreement covers property that the couple obtained either before or during marriage. The agreement could also cover issues of alimony and child support payments.

Marital vs. separate property

When it comes to divvying up assets during a divorce, the law categorizes property as either marital or separate.

Marital property includes real and personal property acquired by either spouse during the course of a marriage and before the couple separated. The property must be presently owned and is normally presumed to be property acquired after the couple were married.

Separate property is property owned before the marriage or inherited by only one of the spouses. It could be a gift or inheritance received by one of the spouses from someone other than a spouse.

Most states consider inheritances as exempt from a 50-50 split during a divorce.

With the notable exception of New Hampshire, most states consider inheritance as separate property. The inheritance belongs exclusively to the spouse who received it and cannot be divided in a divorce.

But the actions of a spouse can convert separate property to marital property.

When separate property is intentionally commingled with marital assets, it is called “transmutation of property.”

An example of intentional transmutation would be where one spouse inherits a large amount of cash from a deceased relative. If the spouse deposited that cash into a joint bank account and the couple began using the funds during the marriage, the inheriting spouse would have a hard time convincing a judge during divorce proceedings that the inheritance was separate property.

The complicated process of the direct tracing of separate property

Say the spouse makes some ongoing improvements to the marital home with inherited money. When it comes time to divvy up assets, the spouse could claim reimbursement from community property assets through direct tracing.

To prove that the payment was financed through the separate property of one spouse, the court must see bank statements documenting specific amounts that the spouse contributed to improving the community property.

The effect of prenuptial agreements on inheritance

Mainly in the case of second marriages, today, couples are using prenuptial agreements. The agreements:

• cover assets each has accumulated prior to marriage
• frequently specify assets earmarked for their children—inheritances, gifts, etc.– that were arranged well before the second marriage.

Before entering into a prenuptial agreement, it is wise to consider the pitfalls, especially in cases where the power distribution between the spouses is unequal and the terms could be unfair.