Protecting Your Inheritance

By
September 20, 2021

So you’ve received an inheritance and you’re married. The person who left you the inheritance probably intended for it to benefit you, not your spouse, if you get divorced. How do you protect the inheritance?

Wisconsin law provides limited protection.  Under Wisconsin’s Marital Property Act, which governs the classification of assets during marriage and on the death of a spouse, property received by one spouse as a gift or inheritance from a third party is classified as the recipient’s individual property. This is an exception to the general classification of assets owned by a married couple as marital property.

Divorce is more problematic. While property received by one spouse as a gift or inheritance is generally not subject to property division in a divorce proceeding, the court has discretion to divide inherited assets if it finds that not dividing the property will create a hardship on the other party or on the children of the marriage.

What should you do?

You could sign a prenuptial agreement (before you marry) or postnuptial agreement (if you are already married) with your spouse that is effective on divorce, classifying assets received by gift or inheritance, the income generated by those assets, and appreciation on those assets as the recipient’s individual property. The agreement would waive any rights a party might otherwise have under state law to the assets inherited by the other party.

Regardless of whether you have a prenuptial or postnuptial agreement, you should keep inherited assets completely separate from marital assets.  For certain assets, such as real estate or business interests, it’s easy to maintain this separation. For assets like cash and investments, you should open accounts titled solely in your name and hold only inherited assets in those accounts.  For example, don’t commingle inherited assets and wages from your job in the same checking account, even if the account is titled solely in your name.

Other do’s and don’ts:

  • Don’t add your spouse’s name to the title of inherited assets or use inherited assets to purchase assets titled with your spouse unless you intend to create a marital asset.
  • Don’t use inherited assets to satisfy marital debt or pay marital expenses. For example, don’t pay off the mortgage on the home you own jointly with your spouse unless you intend to make a gift to your spouse.
  • Don’t use marital assets to pay expenses related to an inherited asset. For example, if you inherit the family cabin, using marital assets to pay for repairs and maintenance could result in some or all of the cabin being treated as a marital asset even if it is titled solely in your name.
  • Do keep good records showing that you alone (not you and your spouse) received the inheritance. The records should include who the inheritance was from, documentation of how the inheritance was received (for example, a copy of a will, trust or beneficiary designation), what assets were inherited and the value of the inherited assets, when the inheritance was received, and what you did with the inherited assets after you received them.
  • Consider setting up a revocable trust to hold the inherited assets. The trust provides a mechanism to keep the inherited assets separate from your marital assets. The trust can also be used to direct how the inherited assets will be distributed on your death.

Finally, as you plan your own estate, consider this: The best way to protect assets for a beneficiary is to provide in your estate plan that his or her inheritance will be held in a lifetime creditor protected trust, assuming the value of the inheritance warrants the use of a trust. Generally assets held in a third party trust (a trust one person creates for the benefit of someone else) can’t be reached by the beneficiary’s creditors, including an estranged spouse, if the trust is properly drafted and administered. Also, because the beneficiary doesn’t have outright control over the assets, a trust insulates the beneficiary from a request or demand by a spouse to retitle the inherited assets into both spouses’ names during the marriage.

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Disclaimer

The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.

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