Inheritance and divorce. When mixed together, it can get ugly. Here is the scenario – your great-aunt just died and left you with several hundred thousand dollars, but you know that you and your spouse are thinking of getting divorced; are you going to have to share this inheritance? Inheritance is a tricky piece when it comes to divisions in divorce. We’ll say this upfront, an inheritance received is likely to be considered separate property (with some exceptions). Likely. Of course, there are rules that govern divisions of assets in California. We’ll explore how an inheritance is split up in a divorce through these following topics:
- What California Says About Community and Separate Property
- Is Inheritance Community Property?
- Determine Property Value and Dividing the Property
- What Happens When Inheritance is Commingled in Marital Property
- How to Deal with Inheritance and Divorce
Is Inheritance Community Property or Separate Property?
A couple of quick definitions for community property and separate property found on the California Courts website says:
Community property means that a marriage or the registration of a domestic partnership makes 2 people 1 legal “community.” In other words, two become one and all property belongs to this 1 legal “community”.
Separate property is anything you have that you owned before you were married or before you registered your domestic partnership. Neither spouse can claim an interest that is the other spouse’s separate property.
How Is Inheritance Community Property if It’s Given to One Spouse?
When it comes to inheritance and divorce, it depends on how the inheritance was given and how you handle the inheritance while you are married. Follow these scenarios below to understand inheritance and divorce.
If the inheritance is given to you before you are married, that property is surely yours and yours alone. First, because you received the inheritance before you were married which means that is separate property. Second, California law generally treats inheritance as separate property.
If the inheritance is given to you after you are married, it could be separate property or community property depending on what the will says. If the will says that the inheritance is to go to only you, then the inheritance is solely yours. If the will says that the inheritance is to go to you and your family or next of kin, then this opens up the floor to allow your spouse to make claim to the inheritance in case of a divorce. The only way to keep the inheritance from being split up in a divorce, in this situation, is to prove to the court that the decedent meant to give the inheritance to you and you alone.
What Happens When Inheritance is Commingled in Marital Property
Keeping separate property in a marriage is tricky, especially if you don’t ever think about divorce. Once you commingle, or mix, your separate inheritance with a joint marital account, you might be forfeiting your sole claim to the inheritance. In other words, if you commingle $200,000 of your inheritance by putting it into the joint savings account, that money is no longer yours alone. This gets especially complicated when its in a joint investment account and it accrues compound interested and its co-mingled.
When you inherit real estate and you move your family in and use it as your family home, your spouse can lay claim to the house too if you get a divorce. To go even further, if you rent out the inherited house and use the funds for your family or put it in the joint bank account, that money becomes community property.
How to Deal with Inheritance and Divorce
You never anticipate a divorce when you say ‘I do’, but it’s always good to set things right from the beginning. With inheritance and divorce, there is something you can do to make sure that it stays as your own separate property throughout the marriage. If you received the inheritance before you go married:
- make sure that you put the money in a separate account that has only your name on it
- with real estate, don’t move your family into the house
- with renting out the inherited real estate, don’t use the funds towards family expenses like paying the family house mortgage and don’t put the rental income in a marital joint bank account
If you receive the inheritance after you are married:
- Have a lawyer draft a postnuptial saying that the inheritance is yours alone and make sure that both you and your spouse sign it. A postnuptial agreement can override California community property laws because both you and your spouse agree that the inheritance is yours alone, no matter what you do with the money
Determine Property Value and Dividing the Property
If the inheritance is an issue in court, a judge may assign an appraiser to give value to the inheritance; it could be anything from an antique painting, to a house or even an old souvenir from the civil war. A monetary value is given to the asset in question, then divided as community property. The spouses can decide to:
- Have one spouse buy out the other
- Sell the asset and split the money
- Hold onto the property and own it together even after divorce
Conclusion about Inheritance and Divorce
So, is inheritance community property? The general concept for dividing inheritance in a divorce is dependent on several things:
- how it is passed on in the will of the decedent (to you alone, or to you and family, or to you and next of kin)
- what you do with the inheritance during the marriage
If you have already commingled your inheritance with marital property, talk to a lawyer about what you can do to make sure that it stays your own property in case of a divorce. An inheritance is a grand gift to receive and you certainly don’t want to lose it if you end up splitting from your spouse.