You may have received an inheritance from someone in your family—perhaps a grandparent left you money, a parent left you a family home, or a relative made you the beneficiary of a 401k. It’s likely the asset was given as a gift of love or after years of hard work. If you receive that inheritance before you get married, you may wonder if the asset is still yours alone should you get divorced.
The experienced estate planning attorneys at Landskind & Ricaforte Law Group, P.C. can help protect inherited assets from becoming entangled in divorce proceedings. With the right strategies in place, you can preserve your wealth and avoid a legal dispute that can drain your finances. Here, we discuss how inheritance protection works and how to help ensure you keep what was given to you.
Don’t Commingle Your Inheritance Asset
Many people assume an inheritance is automatically protected in a divorce. But in reality, protection often depends on how the asset is handled from the moment it’s received.
In New York, an inheritance is generally considered separate property and is protected from division in a divorce. This means it belongs solely to the spouse who inherited it. Marital property, on the other hand, includes all property acquired by either or both spouses during the marriage, regardless of how it’s titled.
The challenge arises when separate property gets mixed with or “commingled” with marital property. This can include depositing funds from the asset into a joint bank account or using the asset to buy a house with your spouse. Other ways an inherited asset can be considered joint property include the following:
- Using the asset to pay shared expenses
- Retitling property you bought with the inheritance to include a spouse’s name
- Using the inheritance to pay for repairs or upgrades on a house owned jointly
Keeping your inheritance distinctly separate from marital assets is the key to protecting it. Courts often look closely at intent and behavior. If an inherited asset appears to have been treated as marital property, it may be divided during divorce, and commingling can undo years of planning. Once commingling occurs, reversing the impact is rarely straightforward. That is why proactive planning matters.
Tracing Your Inherited Asset
Once your inheritance is commingled, it can lose its status as separate property and be reclassified as marital property. This would make it subject to division. So, it’s important that you’re able to provide clear evidence that the inherited asset remained separate throughout your marriage. You can do this by the following:
- Documenting where the inherited asset came from.
- Showing where you deposited or placed the inherited asset.
- Providing relevant evidence that the inherited asset remained separate throughout the marriage.
- Providing bank statements. These statements should show deposits, transfers, and balances over time.
- Providing closing documents. If you used some of your funds to buy property or perhaps a home, it’s important to show how much of your inherited asset was used.
- Providing account histories. If you moved funds between accounts or put some of your inherited asset into a joint account, it’s important to show how, when, and why it was used.
Tracing an inherited asset can be especially challenging if the commingling has occurred over a long period, with multiple transactions and no clear record-keeping or paper trail. Without sufficient proof, the court is likely to classify the entire commingled asset as marital property.
It’s important not to wait until you begin divorce proceedings to begin tracking your inherited asset. By that time, your records may be incomplete, accounts may have changed, and details may be difficult to reconstruct. Our attorneys can help you establish a clear system from the beginning, so you have a specific and detailed record of the asset.
Using an Inheritance Trust to Protect Your Asset
An inheritance trust is an effective tool for safeguarding assets from divorce. Instead of transferring an inheritance asset outright to a beneficiary, the inheritance is placed in a trust with specific rules governing access and distribution. Because the beneficiary does not technically own the asset outright, it is generally less vulnerable in divorce proceedings.
How a Discretionary Trust Can Provide Added Protection
Not all trusts provide the same level of security, and a discretionary trust may offer stronger protection for an inherited asset. In New York, a discretionary trust is an estate planning tool where the trustee has absolute authority to decide when, if, and how much income or principal to distribute to a beneficiary. This structure may offer the following key advantages:
- It limits direct access. A beneficiary doesn’t have automatic rights to the inheritance funds, and this can reduce claims by a divorcing spouse.
- It provides creditor protection. Assets held in trust are often shielded from external claims, including divorce settlements.
- It preserves the initial intent. A discretionary trust can help ensure that assets are used according to the original wishes of the person who created it.
A properly drafted trust can also include provisions that address divorce scenarios directly, and this can help reinforce the protection of the asset.
Prenuptial and Postnuptial Agreements
Prenuptial and postnuptial agreements allow couples to define how assets will be treated if the marriage ends. These agreements can specifically address an inheritance, ensuring it remains separate property regardless of how it’s used during the marriage. For families with a net worth of $2 – 5 million and may be concerned about preserving generational wealth, these agreements provide clarity and predictability.
How These Agreements Provide Protection
By following these tips, a well-crafted agreement can help protect your inherited asset:
- Make sure your agreement provides clear identification of separate assets. Create a list of existing inheritances, so you avoid any ambiguity should you divorce your spouse.
- Include future inheritances in the list. You should define assets that you haven’t yet received to help ensure your protection is forward-looking.
- Be sure your agreement meets all legal standards to help ensure it remains enforceable.
- Provide regular updates. Life changes may require revisions to maintain relevance.
If you draft a prenuptial and/or postnuptial agreement properly, it can significantly reduce the risk of disputes should you decide to divorce.