0224: How to Handle Inheritances and Gifts in Divorce

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It's been a little while since I have done an episode and it's been a very busy couple of months, so apologies about that. But I want to discuss a topic that's been coming up quite a bit in the coaching calls.

 

And that is how you handle inheritances and gifts during a divorce. It's a tricky question. And it's an important question because oftentimes your parents, or someone, will leave you a substantial sum and you want to protect that during the divorce process. Sometimes that inheritance money comes at a poorly time to time where you can't control it. Someone passes away, unfortunately, and you receive some money maybe right before a divorce or during the divorce process. And you're trying to figure out, well, what should you do?

 

I just spoke with someone the other day who had filed for divorce and then, unfortunately, a parent passed away, eight months into the divorce process And they were wondering, "Well, how do we handle this new inheritance that arose, and what to do about that?" And so in this episode, I want to give you some tips when it comes to handling gifts or inheritances and how to protect that property. And really, the main thing is how do you prevent it from becoming a community property, which is the property that is subject to, or that you're going to end up having to split as part of the divorce process.

 

So let's go through a few quick tips.

 

The first thing is if you receive an inheritance, or you receive a gift from someone, keep that stuff in your name only. Meaning, if you get some money, let's just say a hundred thousand dollars, because I'm going to use that as an easy example. If the parent passes away and gives you a hundred thousand dollars, don't deposit that into a joint bank account. Set up a separate bank account that's in your name only. And we're going to call it your inherited funds account. And so put the money in that bank account separately so that it doesn't get commingled with the other assets. And that could get complicated because not always is an inheritance a gift. Sometimes it may be a home or a car or any other type of property. Whatever it is, make sure to title it in your name only.

 

The second thing is don't let your spouse make any contributions to that gift or that inheritance. And the house is the easiest way to illustrate that. If you inherit a house and let's just say it's been run down for a little and it needs some repairs to get it up to speed. Well, one of the things that you should do is don't let your spouse contribute financially to those repairs because the value increase of that house, or even the whole house itself, depending upon where you are, could now come into question as part of the divorce process. And sometimes this may be a house that you maybe just made renovations or adjustments on a few years ago, and now the divorce process is happening. And now you're wondering, "Well, is any part of that house marital property, because my spouse helped renovate the master bathroom and bedroom in there?" And so if that's your situation, be very careful and think through what you're going to do with that inherited property. And if you can keep your spouse from making contributions to it, financial or labor even, then you should do so.

 

The third thing is to consider transferring that inheritance or gift to a trust. Now, oftentimes a parent who was savvy in estate planning, or at least inheritance