It happens. One or the other spouse receives an inheritance either before or during the marriage. Plans are made to put these financial resources to use on behalf of the marriage and the family without much thought to record-keeping or segregating assets. Then the unthinkable event of divorce appears on the horizon. Now the challenge begins – the breakdown of the financial issues that have arisen over these inherited assets.
The ramifications of decisions made regarding these issues can have long-standing cause and effect for value, taxes, ownership and other considerations.
This would be the time to consider engaging the services of a certified divorce financial analyst® to provide assistance in ascertaining the appropriate calculations that need to be applied to sort out the allocation of interests between spouses in divorce and separation.
So now let’s take some time to work through some key data points of a few hypothetical scenarios that may resonate with you or someone you know.
A common theme applicable to all of the hypotheticals below is whether or not there was consistent and accurate record keeping.
Prior to your marriage, you receive inherited funds from the estate of a parent or relative. Fast forward three years and you become engaged and subsequently married. You and your spouse decide that you want to purchase a home and it is agreed that either all or a part of the funds received from your inheritance will be used as a down payment to acquire the home. Later you sell this home and use the proceeds from that sale to purchase another residence where you live for the remainder of the marriage.
A. The down payment. If the jurisdiction where you reside recognizes the concept of separate property as not being a part of considering the value of the marital estate, then the funds utilized for the original down payment would be considered separate property. If not, then the rules of your specific jurisdiction would dictate how this is handled.
B. Tracing. Upon divorce, the issue will be whether or not reimbursement should accrue to the spouse who provided the original down payment funds and how those funds are were transitioned in the subsequent home purchase. It will be necessary to make sure that you have access to adequate documentation regarding all of the transactions so that the analysis can be accurate.
As a single person, you purchase a condo as an investment property from funds you received as the beneficiary of your mother’s trust. The primary use of the condo is a rental property. Five years later you decide to get married. After your marriage, you still keep the investment property in your name but marital funds are applied for upkeep, taxes, etc.
A. Accounting. Here the issue will be how the financials were organized and/or segregated before and after marriage for rental payments, property management, expenses, etc.
B. The character of the real estate. The condo originally was purchased prior to marriage with inherited funds and so would have attained a separate property designation if the jurisdiction where you reside recognizes the concept of separate property as not being a part of considering the value of the marital estate. If not, then the rules of your specific jurisdiction would dictate how this is handled.
C. Contributions to the real estate. The issue at divorce is whether or not the marital estate should be allocated any amounts that were paid toward the maintenance and upkeep and whether as a result of these contributions the real property increased in value. Once this amount is determined, the method of compensation will need to be applied through choices such as allocation of other marital assets, sale of the property, etc.
You become engaged and marry into a family with substantial wealth. Your in-laws suggest that you make your home in one of the residences that their family owns as a part of a real estate trust for which your new spouse is a beneficiary. You are not added to the title of this property. Prior to your marriage, you had your own consulting business which you continued to maintain and operate during the marriage. Various improvements, renovations, and upkeep were done to the property during marriage and some of the funds from your business contributed to these expenditures.
A. Ownership. There is a question as to your standing with this property. Depending on the laws of your jurisdiction, there may be other extrinsic evidence that can be provided to sort out exactly what the original intention was in suggesting and allowing you to reside in the real property.
B. Contributions to the real estate. Your income during the marriage was used for various reasons and purposes related to maintaining the residence. The question at divorce is whether you can recoup these amounts or for example whether these amounts would be considered a gift to the marital estate. The resolution of this point will rest on local laws and the facts and documentation brought forward to support these contributions.
Each one of these hypothetical scenarios underscores the challenges with apportioning reimbursement, participation in equity value, potential changes in the character of property from separate to marital, etc.
Working with your certified divorce financial analyst® to sort this out will help your mind steer clear of emotional overload and allow you to have the bandwidth to focus on the data that will yield the best result.
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