Unfortunately, marriage isn't always forever, so all states have laws and rules regarding what happens to property when a couple divorces. A number of factors can determine how it's divided, but some common rules apply, particularly with regard to inheritances. If someone bequeaths property to you, whether your spouse is entitled to a bite of its equity depends on what you do with the gift after you receive it.
Although community property states and equitable distributions states divide marital property differently, their rules are pretty much the same regarding a spouse's separate property. Separate assets are not typically divisible in divorce. If you bring an asset into the marriage – such as an inheritance you received before your wedding – it's yours. If someone leaves you property while you're married, it's yours as well and you don't have to share it. A big caveat exists with regard to this rule, however. If the bequest was made to both you and your spouse, the inherited property is marital property and a court will divide its entire value in a divorce.
Your inherited property is only safe from division with your spouse if you take care to preserve its status as your separate property. Otherwise, transmutation can occur. The separate character of your property can change and it can become marital or community property in the eyes of the law. For example, if you inherit property and put the deed in joint names with your spouse, you've transmuted its character. Some states are particularly strict – if your spouse even lives on the property, this can transmute its separate nature. A common way of transmuting real estate is to use marital money to pay its taxes or for maintenance and upkeep. Sweat equity can factor in as well if your spouse commits physical labor to improving or caring for the property.
With divorce and inherited property, the term "equity" takes on a slightly different meaning. It's the difference between the value of the property at the time of the marriage or when you received it, and its value as of the date of separation or divorce. For example, if your uncle leaves you a $300,000 house after you're married, and if it's worth $350,000 five years later when you divorce, it has $50,000 in divisible equity. This assumes you didn't also inherit a mortgage. Your spouse might not be entitled to a share of the home's full $350,000 value, but it depends on how you transmuted the property. If you placed the deed in joint names, a court could interpret this as you having made a gift of the property to the marriage. Otherwise, if your spouse contributed labor to the property during your marriage or if you used marital money on taxes or upkeep, he would probably only be entitled to a share of the equity or its increase in value.
Burden of Proof
The spouse who claims that inherited property is her separate asset generally has the burden of proof to convince a court that her spouse is not entitled to a share. Unfortunately, if you're defending a separate asset against division in a divorce, you can't simply take the witness stand and tell the judge that your uncle left you the property so your spouse can't have any of it. You'll need proof, not only of the origin of the inheritance – such as a copy of your uncle's will – but documentation regarding everything you did with the property in an effort to maintain its separate status. If you retitled the house, you'll need a good reason why you did so to prove that you weren't gifting it to your marriage.
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