How to Address Inheritance Issues in a Prenup

Jan 21, 2023 | Prenuptial Agreements, Protecting Assets

It is a common misconception that inheritances are automatically protected in a divorce. That’s simply not true! Inheritances are not safe from being divided up in a divorce unless you put it in a prenup. Keep reading to learn how to address inheritance issues in a prenuptial agreement.

 

Step 1: Understand what inheritances you have coming your way

Part of the prenup-making process is disclosing all finances. This part is known as financial disclosure. You basically provide a snapshot of all of your assets and liabilities, including your inheritance(s), on a financial schedule which is then attached to the back of your prenup. On this financial schedule, you must provide a monetary value for each asset. It follows that you must also include a value next to your inheritance. You cannot leave it blank. 

What does this mean? It means you must talk to your parents and grandparents or anyone you think you may receive an inheritance from and ask them how much the inheritance will be. You cannot leave the inheritance value blank on the financial schedule, so this step is a must, no matter how uncomfortable it may be. If you don’t include the value, you risk losing a portion of the inheritance in the divorce. 

Talking to your folks about your inheritance can be difficult, but it is a necessary feat. If your parents push back on you, there are ways you can handle this. Make sure to bring up the inheritance/prenup talk at a good time for both you and your parents/grandparents. It can be tense or awkward, so you’ll also want to prepare. 

 

Step 2: Decide internally how you want to treat these inheritances

Now that you know how much money you’re going to receive start thinking about how you want it to be handled in the prenup. Maybe it’s $100,000, and you think to yourself, “I’m happy to possibly split this with my spouse because they helped me through school, so it would only be fair.” In that case, you would outline in your prenup that the inheritance should be joint property subject to division (i.e., marital/community property). Or maybe it’s $100,000, and you think, “this would be a great way to support myself if the marriage were ever to come to an end.” If that’s the case, you might decide to outline in your prenup that it’s separate property, not subject to division. Either way is acceptable; it’s up to you what to do. This is a personal decision. 

Let’s look at an example of inheritances to get the brain juices flowing. Sarah and Jake are engaged and plan to get a prenup. Sarah has a feeling she will be getting a hefty inheritance from her grandfather who invented toaster strudels. She gives old gramps a buzz, and sure enough, he lets her know she’ll be receiving $5 million when he kicks the bucket. Grandpa is already 95, so she knows this inheritance could actually be coming in the next few years. She starts thinking about how she wants to handle her inheritance in the prenup. On the one hand, Jake is the love of her life and has supported her through everything; even if they get divorced, she wouldn’t mind splitting some of her fortune with him. On the other hand, her Grandpa worked so hard for that money and who knows what could happen. What if Jake were to cheat?! She wouldn’t want to give away her money then. Sarah goes back and forth on what to do and finally decides she doesn’t want to come off as greedy and decides to outline that her inheritance is not separate property and should be treated as marital/community property (i.e., joint property subject to division). 

Fast forward a few years. Gramps sadly passed away at 99. Sarah got the money. She didn’t bother keeping it in a separate bank account because she knew she was sharing it with Jake anyway according to their prenup. Jake ends up cheating on her and they get a divorce. During the divorce proceedings, the court determined that the inheritance was commingled (more on commingling below) and effectively marital property, subject to division. The court now has the discretion to divide up the joint bank account with the inheritance. Maybe that’s 50/50, maybe that’s 60/40, 70/30, or any other combination of a split. It all depends on which state law is applied and the specifics of Jake and Sarah’s case. Either way, Sarah probably isn’t too happy with this outcome. She wished she had just kept her property in a separate bank account and outlined it as separate property in her prenup to avoid this situation.

 

Step 3: Discuss with your partner your decision 

After you’ve decided what you want to do with your inheritance, you will want to discuss it with your partner, among many other things you’ll have to discuss. You can sit down and explain your thoughts on why you want to keep your inheritance separate (or why you want to possibly share it with them). You can be open to suggestions, but at the end of the day, if you want to protect your inheritance, you will need to include it in your prenup. If you are somehow persuaded by your partner and decide to not protect your inheritance in your prenup, there’s no going back on that. You agreed to it, and if the prenup is valid and enforceable, you are stuck with that choice. Choose wisely!

 

Step 4: Outline your inheritance as either separate or joint property in the prenup

Most importantly, you should make sure to outline your personal and joint decision on the inheritance in the actual prenup itself. This basically comes down to one question: do you want it treated as separate property (not subject to division) or marital/community property (joint property subject to division)? Remember, if it’s deemed separate property, it is generally considered your property alone and will not be divided up in a divorce. If it’s deemed marital/community property, it is generally considered joint property and will be divided up in a divorce according to divorce property division law.

 

Step 5: If you are protecting your inheritance, understand the concept of commingling

One important aspect to keep in mind is commingling. Commingling is the act of mixing separate property and marital/community property to the point that it cannot be untangled. This concept is best explained through an example. Let’s say Sarah gets a $5 million dollars inheritance. She outlined in her prenup that she wanted to keep it separate. However, her actions during marriage speak differently. She deposits the $5 million into a joint bank account and gives her husband full access to withdraw and deposit from the inheritance money. If the inheritance isn’t able to be untangled from the joint bank account, then it’s likely that the entire joint bank account will be deemed joint property, including the entangled inheritance. 

Moral of the story? Even if you outline in your prenup that your inheritance should be kept separate if you commingle that inheritance, you could end up losing it anyway. Be very cautious of commingling and make sure your actions line up with what you say in your prenup. In other words, keep property that you want to be separate, actually physically separate! 

 

Step 6: Don’t forget about gifts! 

A word to the wise: gifts are very closely related to inheritances because they are basically money (or other property) given to you from another person. The major difference between gifts and inheritances is the gift-giver is alive when they give the money, and the inheritance-giver is not. Gifts that are worth protecting are usually more significant in value. You probably don’t care about protecting the t-shirt your Mom got you for Christmas one year, but you would care about the lake house your parents generously gifted you for your wedding. Maybe your grandparents give you $10,000 for every birthday. Whatever it may be, think about if you’d be okay sharing that thing in a divorce. If the answer is no, then you probably want to outline gifts as separate property in your prenup, as well. 

 

Step 7: Reassure your family on how your prenup will be treated in your prenup

And that’s a wrap, folks! You’ve completed almost all the steps there are to take when it comes to addressing inheritance issues in a prenup. You’ve spoken with your family (i.e., the inheritance-givers), you’ve outlined the value of the inheritance in your financial disclosure, you’ve stated what you want to happen to said inheritance in the prenup, and you’ve educated yourself on commingling. And you included your wishes for any gifts, as well! All that’s left? Tell your family the good news (they may breathe a sigh of relief that their hard-earned cash is going to be protected). Or maybe you’ve decided to share such inheritance. You should consider sharing that news as well (if you want). At the end of the day, you’ve got yourself a valid prenup, and that alone deserves a pat on the back! Congratulations!

 

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