Many people may think of property division and alimony when they think of prenuptial agreements (i.e., prenups), which are pretty much the meat and potatoes of a prenup. However, there is also the division of gifts and inheritances, a lesser-known aspect of prenups but equally as important. A gift is anything that is given to you by a family or friend, such as a wedding gift. An inheritance is something that is passed down to you after someone dies.
So, it begs the question: How will you treat your gifts and inheritances in the event of a divorce? For example, will you make sure that they stay separate or allow them to end up in the marital pot?
In this article, we’ll discuss the legal and practical considerations involved in creating a prenup that covers gifts and inheritances.
Understand the Legal Framework
Before drafting a prenup that covers gifts and inheritances, it is essential to understand the legal framework that governs these assets. In many states, gifts and inheritances received during the marriage are considered separate property (not subject to division) in a divorce. However, that can quickly change through commingling, spousal contributions, and/or special circumstances. The moral of the story is your gifts and inheritances are not automatically “safe” under state law, which is where a prenup comes in. A prenup can make sure to categorize your gifts and inheritances as separate property, making them not divisible in a divorce.
The Importance of Disclosure
Financial disclosure is extremely important in creating a legally enforceable prenup. Both parties must be completely transparent about all of their assets and liabilities, including any future inheritances they may receive, which means including the exact value of each inheritance in their prenup.
So, if you aren’t sure of how much money you will be receiving from Great Grandpa John, you need to ask him. Then, in your financial schedule, you should include the estimated amount of the future inheritance.
The part of the prenup process that requires sharing of assets is known as “financial disclosure.” This means that both parties should provide a comprehensive list of all assets and liabilities, including any gifts or inheritances and the anticipated value of each. This information should be provided in writing in something typically known as a financial schedule and will ultimately be attached to the end of the prenup agreement.
This level of transparency is essential to ensure that the prenuptial agreement is legally enforceable and provides the intended protections. Think about it this way: if you didn’t get the full picture of your partner’s finances, you might have no idea that your spouse is in major debt or a soon-to-be millionaire. With that knowledge, your preferences for the prenup terms may change.
Define Gifts and Inheritances
To avoid any confusion or misunderstanding, it is essential to define what constitutes a gift or an inheritance in your prenup. Typically, this is nothing you need to worry about as a non-lawyer; it’s the lawyer’s job to make sure gifts and inheritances are defined properly. HelloPrenup will also do this for you. For example, a generic definition of a gift is “a voluntary transfer of property from one person to another without any expectation of receiving something in return.” But there are many twists and variables in this definition, and it may look different in your prenup, and that’s okay!
An inheritance, on the other hand, is generically defined as “property received by one person from a deceased individual through a will or inheritance law.” Again, the definition may look different in your prenup, and that’s alright; there are a ton of ways to define these things, and they can all be accurate.
Considerations for Dividing Gifts and Inheritances
Now, you may be wondering, what should I think about when deciding how to divide my future gifts and inheritances? There are multiple considerations that must be taken into account. These may include the following:
The nature of the gift or inheritance
First off, what is the thing? Is it $1,000,000 or $10,000? Is it a house? Maybe it’s a vintage car that could be worth a lot of money one day. Whatever it may be, your first consideration should be the nature of the gift or inheritance, its current value, and potential appreciation or depreciation in the future. This information will help you decide what to do with the gift or inheritance. If it’s worth a ton of money, maybe you want to keep it separate (or the opposite!). Or if it’s something on the smaller end, maybe you’re fine with sharing in case of a divorce. It’s your call!
The intentions of the giver
Another essential consideration is the intentions of the giver. If the giver intended the gift or inheritance to be a personal asset for you and you alone, it might be appropriate to make sure it stays separate property in the prenup. For example, if your Grandmother plans on leaving you $100,000, but has strict intentions of you using that for starting your own boutique, then maybe it’s best to keep that separate, given your Grandma’s intentions.
Finally, it’s crucial to consider the tax implications of dividing gifts and inheritances. Depending on the nature of the asset, there may be tax consequences associated with dividing it.
Decide How Gifts and Inheritances Will Be Treated
After you’ve thought about the different considerations (i.e., what is the gift/inheritance? What were the giver’s intentions? Are there any tax implications?), it’s time to make some big decisions. How will your future gifts and inheritances be treated in the prenup? Will you keep them as separate property or not?
Separate Property: You can stipulate that any gifts or inheritances received by either party during the marriage will remain separate property and not subject to division in the event of divorce.
Marital/Community Property: You can also agree that any gifts or inheritances received during the marriage will be considered marital/community property subject to division in the event of divorce.
Creating a Fair and Legally Enforceable Prenup
When creating a prenup agreement that includes provisions for the division of gifts and inheritances, it’s essential to ensure that the agreement is both fair and legally enforceable. If your prenup is not legally enforceable, then your provisions regarding gifts and inheritances will not be upheld by a court. If your prenup is not upheld by the court, then the default state law will apply to you, which may or may not be in your favor.
The bottom line? If you want to make certain your inheritances and gifts stay separate, then you want a legally enforceable prenup, as it’s the only guaranteed way to ensure this.
To ensure a fair and legally enforceable prenup, you should consider working with a state-compliant platform like HelloPrenup and/or a local attorney barred in your state.
Consider adding a sunset clause
Another thing to consider is adding a sunset clause to your prenup. What is a sunset clause, you ask? Well, it’s a provision in a prenup that acts as an expiration date for the prenup. For example, “on our 10th wedding anniversary, this agreement shall become void.” What happens after your prenup “sunsets” (i.e., expires)? The default state law will apply in the event of a divorce.
Why would someone want this? Including a sunset clause can be a useful strategy if you want to limit the prenup’s duration or if you expect the value of the asset to change significantly over time.
Example scenarios to help you conceptualize this topic
If you’re still lost on all of this, don’t worry, we’ve created some basic scenarios for you to get the wheels turning on this topic.
John and Kate are happily engaged. John is an elementary school teacher making a modest salary, and Kate is a trust fund baby, working as a C-suite executive for her father’s very large company. (Succession vibes, anyone?!) Kate anticipates a large sum of money when her father passes away, with an estimated value of $100,000,000. Clearly, there may be concern about where this inheritance goes in case John and Kate ever divorce. Not only is Kate concerned, but her father is as well. While Kate loves John, she’s a realist and understands that relationships and situations change. Therefore, a prenup is in order, which dictates that Kate’s gifts and inheritances are separate property, not divisible in a divorce from John. If they do ever get a divorce, and their prenup is legally enforceable, then Kate’s inheritance will be safe and sound in her possession. They lived happily ever after!
Betty and Bob are engaged. It’s their second marriage, and they’re both fairly well-off. They both have high-paying careers and are sufficiently independent. Betty anticipates a $10,000 inheritance from her Great Uncle. She decides that it’s a small enough amount that she’d be happy to share it with Bob (they’ve been together for so long, and she’s sure if they ever divorce, it’ll be on amicable terms). So, she doesn’t mark her inheritances as separate property and, instead, as marital property. If Betty and Bob ever get a divorce, Bob may receive a portion of that $10,000, but Betty is totally okay with that. They also lived happily ever after!
How you want to treat your gifts and inheritances is totally up to you. You can share or not share, but it’s good to know that the power lies in your hands when you have a prenup. Make sure it’s an enforceable prenup by utilizing state-compliant platforms like HelloPrenup or knowledgeable attorneys in your state.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: [email protected]