I’ve had to break the bad news to clients too many times. The money they had inherited that they thought would automatically stay with them was going to be split with their former spouse. This was often tough news to take. And it’s even tougher when they learn how easy it would have been to keep all of their inheritance for themselves.
Two Types of Property in a Divorce
When assets are divided in a divorce, they are separated into two categories: separate property and marital property. While some details vary from state to state, generally speaking, marital property is all income and assets acquired by either spouse during the marriage. These include pensions, 401Ks and other retirement accounts, all banking accounts, stocks, bonds, cars, houses, boats, tax refunds, furniture, and life insurance. It even includes things like a country club membership and stock options.
If you live in a community property state (Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico or Wisconsin), then both spouses are considered to be equal owners of all marital property.
Georgia is not a community property state so more negotiation is possible when dividing up assets.
Separate property is money that one spouse may have received from pain and suffering in a personal injury judgment, a gift received from a third party to one spouse, any property that is owned by either spouse prior to marriage and any inheritance received before or during the marriage.
The complicated part comes when separate property becomes marital property, often inadvertently. I’ve touched on this briefly before in my blog Financial Mistakes Men Make During a Divorce.
In Georgia, and other states as well, courts have ruled that if you do any of these three things with your inheritance, it will be considered a marital asset:
• Deposit it into a joint account
• Use it to purchase property
• Invest in the other spouse’s business
If you have done any of these three things, that money which is then titled in joint names will probably be considered to be a marital asset. The inheritance is no longer considered separate property and could now be equitably divided.
Another way your inheritance could be at risk is if your spouse makes a non-monetary contribution to inherited property. Let’s say you inherit a lake house from your family. Your wife works with contractors to fix it up and repair bills are paid out of a joint account. Your wife may now be entitled to some share of the house because she has “sweat equity” and funds for it have been taken out of a joint account.
How to Keep Your Inheritance
If you do inherit any amount of money and hope to protect it for yourself in the event of a divorce, plan to deposit and keep that money in a separate account to which you have sole access.
As for any real property, pay for any mortgage, insurance, taxes, utilities, repairs, and upkeep out of a separate account and hire someone to work on the home if you want to be particularly careful about keeping its protected status.
Remember, although your Aunt Martha may have intended her assets to go only to you and not your spouse, her intent doesn’t matter. What does matter is how you handle those assets when you receive them.