Downs Law Firm, P.C.

inheritance and divorce

An Inheritance and Divorce?

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An issue that frequently arises is the treatment of an inheritance received by a spouse during the marriage. The basic rule is that any property received via gift or inheritance during the marriage is exempt from equitable distribution.

What are the rules about your inheritance and divorce?

In my early career I was a divorce lawyer. Just like a bad day at the beach is better than a good day at the office, a bad day in estate planning is lots better than divorce work.

In Maryland property acquired during a marriage can be equitably adjusted, regardless of title, with a few exceptions, including inherited property.

A good add-on to that sentence is something like, “provided that it is kept separate from marital assets.” To say it another way, when an inheritance or any other exempt asset (like a premarital asset) is “commingled” with marital assets, it can lose its exempt status.

To prevent this commingling, many of our clients create ongoing asset protection trusts for their children so that they are legally obligated to not mix the assets. This can now be especially important at death as a spouse will soon be able to elect against non-probate assets in your “Augmented Estate.”

For those without such protections, there may be some argument to salvage a commingling.

Trust Advisor’s recent article asks, “Do I Have To Divide The Inheritance I Received During My Marriage?” As the article explains, this is the basic rule, but it’s not iron-clad.

A few courts say that inheritance was exempt, even when it was left for only a short time in a joint account. This can happen after a parent’s death. The proceeds of a life insurance policy that an adult child beneficiary receives are put into the family account to save time in a stressful situation. You may be too distraught to deal with this issue when the insurance check arrives, so you or your spouse might deposit it into a joint account. However, in one case, the wife took the check and opened an investment account with the money. That insurance money deposited in the investment account was never touched, but the wife still wanted half of it when the couple divorced a few years later. However, in that case, the judge ruled that the proceeds from the insurance policy were the husband’s separate property.

The law generally says that assets exempt from equitable distribution (like insurance proceeds) may become subject to equitable distribution if the recipient intends them to become marital assets. The commingling of these assets with marital assets may make them subject to a division in a divorce. However, if there’s no intent for the assets to become marital property, the assets may remain the recipient spouse’s property.

Courts will look at “donative intent,” which asks if the spouse had the intent to gift the inheritance to the marriage, making it a marital asset. Courts may look at a commingled inheritance for donative intent but may also examine other factors. This can include the proximity in time between the inheritance and the divorce. Therefore, if a spouse deposited an inheritance into a joint account a year before the divorce, she could argue that there should be a disproportionate distribution in her favor or that she should get back the whole amount. Of course, the longer the amount of time between the inheritance and the divorce, the more difficult this argument becomes.

Be sure to speak with your estate planning attorney about the specific laws in your state. If there is a hint of trouble in the marriage, it might be wiser to simply open a new account for the inheritance.

Reference: Trust Advisor (October 29, 2019) “Do I Have To Divide The Inheritance I Received During My Marriage?”