What Do I Do With My Inheritance
By: Lorraine W. Mervan
Whether or not your marriage is on the rocks, you should consider putting your inheritance into an account titled in your name alone. In this way, should your marriage end, the inheritance will be considered a non-marital asset and therefore not included in the marital assets that will be divided between you and your spouse in the divorce settlement or litigation. However, the increase in value of your inheritance funds and the income you receive on the inherited funds in the form of interest or dividends will be considered marital in the event of divorce.
For example, assume you put a $100,000 inheritance into a brokerage account in your name on January 1. You invest the funds in stocks and bonds worth $100,000. Years later, when you and your spouse separate, the stocks and bonds are now valued at $150,000. In your divorce proceedings, your initial deposit of $100,000 will be considered your non-marital inheritance and not included in the division of assets. The $50,000 increase from the time of settlement through the time of separation will be considered a marital asset and subject to distribution between you and your spouse. If by the time of divorce, which could be months later, the account value has increased to $175,000, the additional $25,000 growth is yours and not part of the marital assets. But, if at the time of divorce the account has dropped from $150,000 at separation to $125,000, the Divorce Code provides that the increase in value of the account will be limited to $25,000, that is, the increase in value of the initial inheritance amount at the time of divorce.
Your spouse may be concerned that you are depositing your inheritance into an account in your name alone, particularly if all of your other accounts and assets are jointly titled and your marriage is intact. You can alleviate some of your spouse’s concern by agreeing to deposit your inheritance into an account in your name alone, but with the designation “TOD”– transfer on death –to your spouse. TOD means that during your lifetime, you have complete and total control of your account and your spouse has no access to the account. At the time of your death, the account is automatically transferred to your spouse if you are still together and married at the time of your death. Should you and your spouse separate before your death, you would be able to eliminate the TOD designation at the time of separation. The initial inheritance will not be included in the marital assets, except for the increase in value as discussed above.
The way to ensure that the inheritance is safeguarded from being included as a marital asset is to keep detailed records of the inheritance so that you can trace the movement of the inheritance into an account in your name. In a divorce, you have the burden to prove that the funds in an account that you opened during the marriage contains your inheritance. If you cannot prove that, then there is a presumption that the account, even though titled in your name alone, is marital and will be included in the division of assets between you and your spouse.
Lastly, if you want to insure that your inheritance and the increase in value of your inheritance are not considered as marital assets in the event of separation, and that the income you receive from your inheritance is not considered income to you for purposes of determining spousal support at the time of separation (the income will likely always be considered your income for child support purposes), you should consider having a prenuptial agreement prior to your marriage. If you are married, it is possible to negotiate an agreement with your spouse, called a postnuptial agreement, particularly if your inheritance is very large or includes a sole proprietorship or interest in a business, wherein your spouse may agree to exclude the inheritance and increase in value of your inheritance in exchange for other provisions your spouse may request. Our firm is available to assist you in the negotiation and preparation of a prenuptial or postnuptial agreement.