When Linda* met with her estate planning attorney, her biggest concern was her daughter’s marriage.
While she adored her daughter, she had serious doubts about her son-in-law. Linda feared that if the marriage ended in divorce, the inheritance she worked so hard to build for her daughter would be at risk of being divided as part of a divorce settlement.
Fortunately, with the right estate planning strategies, the inheritance could be protected and stay solely with her daughter, no matter what the future held.
How to Protect an Inheritance from Divorce
In most states, including New Jersey, inheritance is considered separate property, meaning it belongs solely to the person who receives it and is not automatically subject to division in a divorce. However, this protection is not absolute. If an inheritance is commingled with marital assets — such as being deposited into a joint bank account, used to buy a family home or invested in shared property — it may lose its separate status and become subject to division. Additionally, some state laws and court rulings can complicate matters, making it essential to take proactive steps to safeguard an inheritance.
To ensure an inheritance remains with the intended recipient, whether you are leaving an inheritance or receiving one, consider the following legal strategies:
Use a Trust: A properly structured trust can ensure that the assets remain separate property. Provisions can be added to prevent a beneficiary from voluntarily or involuntarily transferring their inheritance to a spouse.
Keep Assets in a Separate Account: If a trust isn’t an option, the next best safeguard is to keep inherited funds in a separate account in the beneficiary’s name only. This means not depositing them into a joint checking or savings account and avoiding using them for marital expenses, such as paying off a mortgage or funding vacations. Maintaining a clear separation can help establish that the inheritance remains the beneficiary’s sole property.
Prenuptial or Postnuptial Agreement: For those who anticipate receiving a substantial inheritance, a prenuptial agreement (signed before marriage) or postnuptial agreement (signed after marriage) can specify that any inheritance will remain separate property in the event of a divorce. These agreements can also outline how inherited assets will be managed during the marriage, reducing potential disputes later. You should consult with an experienced family law attorney to discuss this option.
Keep Detailed Records: Proper documentation is critical in preserving an inheritance’s separate status. Beneficiaries should retain records of how they received the inheritance, where it was deposited and how it is used over time. If legal disputes arise, having clear records can help prove that the funds or assets were never commingled with marital property.
Avoid Using Inheritance to Improve Marital Property: One of the most common mistakes people make is using their inheritance to pay off a shared mortgage, renovate a jointly owned home or invest in a spouse’s business. Courts may view such contributions as gifts to the marriage, making the inheritance fair game for division in a divorce. If inheritance funds must be used for joint purposes, consider structuring it as a loan with formal documentation.
Create an Estate Plan with Protective Provisions: For those leaving an inheritance, it’s important to work with an estate planning attorney to include protective provisions in wills and trusts. Spendthrift clauses, mandatory separate accounts and explicit inheritance instructions can reinforce the intent that assets remain within the family line.
Whether you’re leaving an inheritance to a loved one or receiving one yourself, taking steps to protect those assets from potential divorce disputes is crucial. While state laws generally recognize inheritances as separate property, poor planning and commingling of assets can result in unintended consequences. A well-crafted estate plan, proper financial management and legal safeguards can ensure that an inheritance remains with its rightful recipient, providing financial security for generations to come.
Don’t leave your financial future to chance! Contact a TREEL estate planning attorney today to create a plan that secures your legacy and protects your loved ones from unexpected legal complications.
*Names and some details have been changed to protect the client’s privacy.
