Separate Property Vs. Marital Property
Assets you own fall into one of two categories: marital property or separate property. The definitions of each category are similar in most states, even between community property states, which distribute property equally, and equitable distribution states, which distribute property equitably, but not necessarily in a 50/50 split. Assets acquired during the marriage, regardless of who acquired them or whose name is on the title, are usually considered marital property. One exception to this rule is property acquired by gift or inheritance -- which is generally considered the separate property of the spouse who received it.
Under most circumstances, a divorce court cannot divide separate property since it belongs solely to one spouse, particularly property inherited after the date of separation. However, even if a divorce court cannot divide the house as marital property, inheriting the house might impact the court’s division of marital property. In states that divide property equitably between spouses rather than equally, the judge might consider each spouse’s separate property resources, such as the inherited house, when dividing marital property -- and give more marital property to the spouse who did not inherit the house since the needs of the spouse who inherited are no longer as great.
Spouses can agree to change the character of separate property into marital property; this type of transfer is called transmutation. Some states require written transmutation agreements for valuable items as evidence that the spouses intended to change the character of the property. If the transmutation was the result of fraud, however, the court will invalidate the transfer. If the spouse who inherited a house wishes to get an increased share of a marital asset, he could transmute the house to marital property. When state law requires transmutation agreements, strict compliance with the law is required for court approval.
Spouses can accidentally cause their separate assets to become marital property by commingling, or mixing, separate and marital assets. For example, if spouses live in the inherited house and use marital funds for its upkeep, any increase in the house’s value -- or even the house itself -- could become marital property. Inheriting property in the middle of a divorce might be the best time to inherit since the divorce lessens the chance of the inheriting spouse unintentionally doing something to turn the separate property into marital property. For example, if during your divorce, you inherit a house that you intend to use as a vacation home, you wouldn't offer your spouse the keys so that she can vacation in it as well. Also, if you intend to make improvements to the home before the divorce is final, you would want to use separate funds rather than marital funds to pay for any improvements. The same holds true for paying taxes or insurance premiums in relation to your inherited home; you wouldn't make any of those payments from marital funds, even if the divorce drags on for months.