When things are going well in a marriage, many spouses yield to the impulse to financially share everything under the sun. Financially, this may mean pooling all assets into common bank accounts and sharing and accessing those funds randomly. While some may feel such an approach “strengthens the bond” between a husband and wife during marriage, it can actually prove disastrous if the marriage begins to crumble and marital assets need to be inventoried, valued, and equitably divided. This is especially true when it comes to assets that only one spouse inherited.

Are inheritances subject to equitable distribution?

Under New Jersey’s doctrine of equitable distribution, a divorcing couple’s assets are divided based on precepts of fairness, taking into account a number of factors. Property inherited by only one of the parties, whether before or during the marriage, is an exception to this rule.  By statute, such property is exempt from equitable distribution. This is true whether the inherited property consists of real estate, collectibles, or money. According to the terms of the applicable statute, “[A]ll such property, real, personal or otherwise, legally or beneficially acquired during the marriage or civil union by either party by way of gift, devise, or intestate succession shall not be subject to equitable distribution.” (Emphasis added).

Intermingling funds may eliminate protection

For divorcing spouses, the aforementioned exemption may be impossible to apply if the inheriting spouse transferred exempt assets into jointly held assets, whether by real estate deed; stock share transfer; deposit into a joint bank account, investment account, or brokerage account; or similar act. In legal terms, this is called “intermingling” of assets, which transmutes their character and makes them eligible for division based on ordinary equitable distribution principles. While the trial court may still consider the source of inherited assets, the safest approach is to keep the assets separate so there is no confusion as to their origin or the spouse’s intention.

This office has handled many such cases over the decades, and it is never a pretty sight.  In one memorable case, our client contributed 100% of inherited assets to “the common good” many years before divorce was even considered by either party.  At the time of their divorce, our client could not believe the other party’s refusal to even consider a partial transfer of the other party’s recently inherited property from a deceased parent, to make up for the first party’s inheritance shortfall that was now 100% joint property.  That was a heartbreaking moment for our client, who was no longer young and was “counting on” recouping a portion of the spent assets.  Yet the law provided no such remedy and there was nothing we could do about it.

The same issue arises when, instead of inherited property, one spouse puts up significant dollars that were otherwise exempt — whether because inherited or simply premarital — so the parties could purchase a house otherwise well beyond their economic reach.  If one party takes exempt funds and invests them in the new property, the Deed is put into joint name, and there is no I.O.U. and mortgage to secure repayment of the otherwise exempt funds, what happens upon divorce?  If the marriage is only short term, a year to three years, then an equitable argument remains to the funding spouse:   the other party should not receive a windfall.  However, if the marriage is 10 years or longer, the “short term marriage” argument ceases to persuade, and the equities shift to treating the property as transmuted and intermingled, especially when the house title is held jointly.  The entire asset will become available for equitable distribution, and the exempt dollars will fall into the category of joint dollars.  True, each party will walk away with 50% of the asset’s net value, but the party who paid a tremendous down payment will, upon divorce, want the entire down payment back.  And most often, in longer term marriages, they simply can’t get it back.

Prenuptial Agreements protect assets

We have previously posted about the benefits of Premarital Agreements.  Again here, with regard to one-party inherited assets prior to the marriage, the most dependable way to ensure that equitable distribution is not applied to such property is via Prenuptial Agreement. This is a contract that clearly stipulates that the property with which a husband or wife enters a marriage stays with him or her in the event that the couple divorces – as long as it is not intermingled during marriage.

For inherited property during marriage, the parties may use secured loans between one another to acknowledge separate ownership, with the option of repayment upon sale or divorce, or the inheriting spouse simply has to refuse to commingle the funds.  If the marriage lasts into the parties’ late years, and upon one party’s death, the issue of Premarital Agreements and secured loan devices may persist, or may become moot, depending upon each party’s estate plans and related documents.

Conclusion

When spouses seek to appropriately protect assets they inherit, either before or during marriage, there are tools available to assure that what each of them — and both of them — planned from the beginning will actually come to pass.  Often the economic heartbreak of divorce may be avoided entirely, with proper planning and execution.  This requires excellent help from experienced estate lawyers and financial planners.  Our office works regularly with such experts and we will be happy to make appropriate referrals upon request.

However, in the face of an impending divorce, it is absolutely critical to your success that you secure the services of qualified, experienced, and accessible Family Law attorneys to advocate your best interests.  In our office, we begin with a conversation, a low-cost initial consultation, to allow us to understand the facts, consider the law, and make appropriate recommendations as to the next steps you need to take.  We will coach you in your own negotiations, or, if you prefer, we will represent you in negotiations, mediation, collaborative law, arbitration, or trial law settings.

Our goal is to help you achieve solutions that are right, fair, and reasonable for you.  Our commitment is to serve as your “compassionate counsel and tough advocates”.  Please write or call us today.  We are ready to serve your needs.