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Karen and her grandfather were always close. When he passed away two years ago, Karen inherited a significant amount of money. She and her husband Gary are now divorcing, and the process is getting ugly. To her surprise, Gary is now threatening to take half of her inheritance. Unsure what she stands to lose, Karen is anxious and upset. Can Gary really get half the money Karen’s beloved grandfather left to her alone?
Like many divorcing women in similar situations, Karen is right to be concerned. Under certain circumstances, she could stand to lose some of her grandfather’s bequest; under others, Gary wouldn’t be able to touch it.
But before we dive into the specifics of how to protect gifts and inheritances, let’s review some fundamental concepts.
Whether or not a particular asset can be divided as part of a divorce settlement typically depends on how it is classified –is it considered separate property or marital property ? As with many aspects of divorce, state laws governing separate property differ in the details. Generally speaking though, separate property includes:
Everything else is usually considered marital property , which is divided differently depending on whether you live in a “community property” state or an “equitable distribution” state .
In the community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), spouses are considered equal owners of all marital property, and assets are split 50-50 in divorce.
However, most states are equitable distribution states , in which the division of assets is typically much more complicated. In an equitable distribution state, each spouse has a legal claim to a “fair and equitable” portion of the value of all marital assets, no matter which of them is listed as the legal owner. Note that “fair and equitable” does not necessarily mean “half.” Courts consider many factors to determine what constitutes a fair and equitable distribution of marital property.
So, back to Karen. With inheritances specifically listed as separate property, does this mean she is in the clear?
Well . . . maybe. Here’s the critical consideration:
Inheritances and gifts are typically considered separate property if they have not been commingled with marital assets.
That means if Karen kept her inheritance apart from funds that she and Gary shared –let’s say, in a bank account in her name only (and she did not deposit any marital funds into that account)–then, regardless of Gary’s threats, that money is her separate property, and he has no claim to it. If, however, she deposited the inheritance into a joint account, or used it toward a purchase in both their names, then it most likely became marital property at that time, and is now subject to division as such.
What about gifts? Let’s consider another case.
When Lisa and Roger ran into financial difficulty early in their marriage, Lisa received some money from her parents as an emergency fund. Thankfully, they pulled through without needing it, and have had several prosperous years since. Now they are getting a divorce, and Roger wants that money divided between them as part of the settlement. Lisa maintains it was a loan, and that they should give the money back. Roger says no, it was a gift to both him and Lisa, and that half the money is rightly his.
As I mentioned above, gifts to either spouse from a third party are considered separate property. However, the caution against commingling still applies. If Lisa deposited the money from her parents in a joint account, it then probably became marital property, even if it was intended just for her.
Everything else is usually considered marital property , which is divided differently depending on whether you live in a “community property” state or an “equitable distribution” state .
In the community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), spouses are considered equal owners of all marital property, and assets are split 50-50 in divorce.
However, most states are equitable distribution states , in which the division of assets is typically much more complicated. In an equitable distribution state, each spouse has a legal claim to a “fair and equitable” portion of the value of all marital assets, no matter which of them is listed as the legal owner. Note that “fair and equitable” does not necessarily mean “half.” Courts consider many factors to determine what constitutes a fair and equitable distribution of marital property.
So, back to Karen. With inheritances specifically listed as separate property, does this mean she is in the clear?
Well . . . maybe. Here’s the critical consideration:
Inheritances and gifts are typically considered separate property if they have not been commingled with marital assets.
That means if Karen kept her inheritance apart from funds that she and Gary shared –let’s say, in a bank account in her name only (and she did not deposit any marital funds into that account)–then, regardless of Gary’s threats, that money is her separate property, and he has no claim to it. If, however, she deposited the inheritance into a joint account, or used it toward a purchase in both their names, then it most likely became marital property at that time, and is now subject to division as such.
What about gifts? Let’s consider another case.
When Lisa and Roger ran into financial difficulty early in their marriage, Lisa received some money from her parents as an emergency fund. Thankfully, they pulled through without needing it, and have had several prosperous years since. Now they are getting a divorce, and Roger wants that money divided between them as part of the settlement. Lisa maintains it was a loan, and that they should give the money back. Roger says no, it was a gift to both him and Lisa, and that half the money is rightly his.
As I mentioned above, gifts to either spouse from a third party are considered separate property. However, the caution against commingling still applies. If Lisa deposited the money from her parents in a joint account, it then probably became marital property, even if it was intended just for her.