Proving Money Is Inherited

by Rob Jennings J.D.

Each state has its own laws regarding the division of marital property in a divorce. Community property states, which stand in the minority, require courts to divide an estate equally, whereas equitable distribution states -- the majority -- seek to divide estates equitably, or fairly. In both types of jurisdictions, inherited money is usually considered separate property and not divisible in divorce. The burden of proving that certain funds represent your inheritance, however, will likely rest on you.

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Tracing

Since there's a good chance you weren't anticipating a divorce when you received your inheritance, you may have to engage in forensic accounting to show your trial judge that you inherited a given pool of funds. This practice, called "tracing," requires you to clearly follow the line from your inheritance to the account or asset where you contend it rests presently. Although state laws on tracing inheritances vary, you may have to prove the separate identity of the destination account or asset by the greater weight of the evidence.

Commingling

The extent to which you commingled, meaning mixed, your inheritance with marital property may limit or even eliminate your ability to trace money and extract it from the marital estate. Generally speaking, marital property consists of all property received during a marriage but sometimes, the definition excludes property received by either spouse via gift or inheritance. Depositing inherited funds in an account that also includes marital funds -- proceeds from paychecks or the sale of marital property -- could make it difficult for you to prove how much money remaining in the account is owned jointly and how much is separate. Since the burden of proof rests on you, any confusion could be resolved in favor of the other side.

Transmutation

Transmutation occurs when a spouse does something to change the separate or marital nature of funds or an item of property. In North Carolina, for example, using inherited funds to purchase jointly titled real property usually results in that property being classified as marital, no matter how clearly a party can trace the purchase back to an inheritance. Using an inheritance to buy gifts for one's spouse or pay down marital debts can also result in transmutation. Where transmutation exists, tracing generally ends and the property loses its separate nature.

Distributional Factors

In equitable distribution states, where courts can award unequal distributions in the presence of certain statutory factors, you may indirectly recover all or part of an inheritance lost to commingling or transmutation. Even if you used your inheritance to pay off marital debts or purchase jointly owned property, your equitable distribution judge may use the investment of your inheritance in the marital estate as a distributional factor, justifying an award to you of more marital property or less marital debt than the other side.