When a married couple divorces in North Carolina, they must divide their marital property. The division won’t necessarily be 50/50, but it must meet standards of fairness under state law.
One question that clients often ask when they’re starting the divorce process is whether they must divide an inheritance they received. The answer depends on the circumstances.
Separate property
Remember that the married couple must divide their marital property. They don’t have to divide any separate property. What is the difference between marital and separate property?
For the most part, marital property consists of any assets and debts the married couple obtained during the marriage and separate property consists of anything the individuals owned before the marriage. However, there are exceptions to that rule.
Some important exceptions include inheritances and gifts received by one spouse in their name during the marriage.
To give a simple example, imagine Nick and Nora are married for 10 years before they divorce. During the marriage, Nora’s uncle Stan dies, leaving Nora a generous $100,000 inheritance. The will mentioned Nora only, and so a court would likely find that the inheritance is Nora’s separate property. Because it is separate property, it does not need to be divided in divorce.
Commingled assets
So far, this issue doesn’t seem so difficult, does it? However, the issue of inheritances can get a lot more complicated when inherited assets get commingled with marital assets. This is especially common in cases involving marriages that lasted more than a few years.
To explain what we mean, let’s return to the example of Nick and Nora. Now, imagine that when Nora inherited the $100,000 she deposited it in a new investment account in her name The account does quite well, and after a few years it has doubled in value. Nick and Nora withdraw $30,000 from the account to remodel their patio.
Fast-forward a few years and now Nick and Nora are divorcing. How are they going to divide this investment account? Does Nora get to keep all of it because it started with her $100,000 inheritance? Does it matter that the account was in her name only?
The answer is likely no. A court might decide that Nora gets to keep at least $100,000 from the account because that was the amount of her inheritance. However, Nick likely has a claim to some of the interest the account has acquired over the years. After all, the couple treated the account like it was their marital property during the marriage.
As you might imagine, it can be quite complicated to go through the history of the inheritance and the account in order to determine what share Nick might deserve. In some cases, a court might have to resolve an issue like this. In many other cases, the parties themselves negotiate a solution.