Safeguarding Your Inheritance During a Divorce

Quick answer

• Understand that inheritance is generally considered separate property, but commingling can change its status.
• Keep inherited assets in separate accounts, clearly labeled as inherited.
• Avoid using inherited funds for joint marital expenses or to pay down marital debt.
• Document the source of all inherited funds and assets.
• Consult with an experienced family law attorney early in the divorce process.
• Consider a postnuptial agreement if you anticipate receiving significant future inheritances.

Who this is for

• Individuals who have received an inheritance and are currently going through a divorce.
• People who anticipate receiving an inheritance and are concerned about how it might be affected by a divorce.
• Those who have inherited assets and are unsure about the legal protections available to them.

What to check first (before you act)

Your Goal and Timeline

What do you hope to achieve regarding your inheritance during the divorce? Is your primary goal to keep it entirely separate, or are you open to using some portion for marital obligations? Understanding your ultimate objective will guide your strategy. Your timeline is also critical; the earlier you address this, the more options you will likely have.

Current Cash Flow

Analyze your income, expenses, and any existing financial obligations. This will help you determine if you have the financial capacity to keep inherited assets completely separate or if you might need to consider using some of them to meet marital financial responsibilities. A clear picture of your cash flow is essential for making informed decisions.

Emergency Fund or Safety Buffer

Assess whether you have a sufficient emergency fund. If your inherited assets are your primary source of financial security, depleting them for divorce proceedings might leave you vulnerable. It’s often wise to maintain a separate, accessible emergency fund before considering how to handle inherited assets.

Debt and Interest Rates

List all your debts, including any marital debt, and note their interest rates. High-interest debt, especially if it’s marital debt, might influence decisions about whether to use inherited funds to pay it down, thereby protecting other separate assets. Check the official source or your provider for exact details on your debt.

Credit Impact

Understand how different financial decisions might affect your credit score. For example, taking on new debt or failing to pay existing obligations can negatively impact your credit. This is important to consider if you plan to use inherited funds to settle debts.

Step-by-step (simple workflow)

1. Identify the Source of Inheritance: Clearly determine what you inherited (money, property, investments) and from whom.

• What “good” looks like: You have documentation proving the inheritance, such as a will, trust document, or bank statements showing the transfer.
• Common mistake: Assuming that because it was an inheritance, it’s automatically protected without any proof.
• How to avoid it: Gather all relevant legal documents and financial records related to the inheritance immediately.

2. Segregate Inherited Assets: Do not deposit inherited funds into joint bank accounts or use them to pay for marital expenses.

• What “good” looks like: Inherited money is in a separate bank account titled solely in your name, clearly marked as “inherited funds.”
• Common mistake: Depositing inheritance money into a joint checking account used for household bills.
• How to avoid it: Open a new, separate bank account specifically for your inheritance and direct all inherited funds into it.

3. Avoid Commingling: Do not use inherited assets for purposes that benefit the marital estate.

• What “good” looks like: Inherited funds are used only for your personal expenses, separate investments, or to pay down your individual debts.
• Common mistake: Using inherited money to pay off the mortgage on the marital home or to fund a joint business venture.
• How to avoid it: Maintain meticulous records of where inherited funds are spent and ensure they are not used for anything that benefits both spouses or the marital estate.

4. Document All Transactions: Keep detailed records of all deposits, withdrawals, and expenditures related to the inherited assets.

• What “good” looks like: You have a clear ledger or spreadsheet showing every movement of inherited funds, with supporting receipts or statements.
• Common mistake: Relying on memory or vague notes about how inherited money was used.
• How to avoid it: Create a dedicated file or digital folder for all inheritance-related financial records and update it regularly.

5. Consult a Family Law Attorney: Seek legal advice from an attorney specializing in divorce and property division in your state.

• What “good” looks like: You have met with an attorney, understand your state’s laws regarding separate property, and have a clear legal strategy.
• Common mistake: Trying to navigate complex divorce laws and property division without professional legal guidance.
• How to avoid it: Research and interview several experienced family law attorneys before making a decision, and be upfront about your inheritance.

6. Understand State Laws: Familiarize yourself with your state’s specific rules on separate versus marital property.

• What “good” looks like: You understand how your state defines separate property and the conditions under which it can become marital property.
• Common mistake: Assuming that all inheritance laws are the same across the country.
• How to avoid it: Ask your attorney to explain your state’s specific statutes and case law regarding inheritance and divorce.

7. Consider a Prenuptial or Postnuptial Agreement: If you anticipate future inheritances or want to solidify protections, discuss these agreements with an attorney.

• What “good” looks like: You have a legally sound agreement that clearly outlines how future inheritances will be treated in the event of a divorce.
• Common mistake: Believing that a prenuptial agreement covers all future inheritances without specific clauses.
• How to avoid it: Work with an attorney to draft specific language addressing inheritances within the agreement.

8. Separate Inherited Property: If you inherit real estate or other tangible assets, keep them titled in your name alone.

• What “good” looks like: Inherited property deeds or titles are solely in your name, and you have not added your spouse’s name.
• Common mistake: Adding your spouse’s name to the deed of an inherited house or car.
• How to avoid it: Consult with your attorney before making any changes to the title or registration of inherited property.

9. Maintain Separate Investments: If you inherit stocks, bonds, or other investment accounts, keep them in accounts titled solely in your name.

• What “good” looks like: Inherited investment accounts are managed separately and not linked to joint marital investment portfolios.
• Common mistake: Merging inherited investment accounts with marital investment accounts.
• How to avoid it: Open new investment accounts specifically for inherited assets and direct all investment activity there.

10. Address Marital Debt Strategically: If you decide to use some inheritance to pay down high-interest marital debt, ensure it’s a clear, documented decision.

• What “good” looks like: You have agreed with your spouse (or a court has ordered) that using inheritance for specific marital debt is a mutually understood or legally sanctioned distribution of assets.
• Common mistake: Paying off marital debt without clear agreement or documentation, which can be seen as commingling.
• How to avoid it: Get any agreement to use inheritance for marital debt in writing, ideally as part of a formal divorce settlement.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes | Fix