Tuesday, September 8, 2009

How is an Inheritance Treated in a Divorce

The issue of whether an inheritance is included into the divorce mix is dependent upon the particular circumstances. An inheritance is treated differently when discussing equitable distribution, as opposed to alimony and child support obligations. This article will explain the differences.

Equitable distribution is the splitting up of the marital assets such as real estate, furniture, banking and brokerage accounts, vehicles, as well as liabilities during a divorce. Under New Jersey law, N.J.S.A. 2A:34-23(h), an inheritance or gift obtained either before or during the marriage will be exempt from equitable distribution. So if a wife receives an inheritance as a result of her father’s passing, she is not required to share the inheritance with her husband. Certain restrictions are necessary, if the inheritance is real property the deed must be titled only in the wife’s name. Likewise, if the inheritance is monies, the bank accounts must be only in her name. However, if the inherited house given to the wife is re-titled into both the wife and husband’s names, the court has construed this to be an interspousal gift and the inheritance is no longer exempt from marital property and therefore, subject to equitable distribution. Generally, if the inherited asset such as monies is deposited into a joint banking account or used to acquire something for the marriage (purchase of a condo or vehicle used by both husband and wife) it is likely to be subject to equitable distribution. However, an exception to this rule was carved out in a court case.

In a 1990 case[1], a gift of $10,000.00 was given by a father to his son which at the time was the maximum allowable gift amount one person could give to another in a given year without incurring a federal gift tax. In addition, the aunt also gave the same amount as a gift to her nephew. The recipient of the gifts (the husband) deposited the funds into the marital joint bank account before withdrawing the funds 18 days later. Thereupon, he took the $20,000.00 plus accumulated interest and placed same into an individual certificate of deposit bank account. Subsequently, when the couple divorced the following year, the wife sought to have the funds counted as part of the marital assets since they were deposited into the joint account for the 18 day period. The Appellate Division rejected the wife’s assertions by viewing the intentions of the parties. Both the father and aunt testified during the trial that their intent was to give the funds only to the husband and not to the wife. The husband testified that it was mere convenience to deposit the funds into the joint account for the approximate two week period while he searched for better bank interest rates. It was never his intent to make the funds part of the marital assets and the funds were not used during this brief period. As a result, the court ruled the gifts to the husband exempt from the marital assets.

In regard to alimony and child support, the court will count an inheritance towards a person’s ability to pay. A court may consider, “The income available to either party through investment of any assets held by that party.”[2] So although the actual inheritance amount will not be factored into the amount for payment of support, the interest accrued on the inheritance will be factored into the available funds for support purposes. The Appellate Court considered a father’s inheritance in calculating child support stating that it was proper to include it even though he spent the inheritance on a new house and vehicle.[3] In a similar case, the court felt it was necessary to, “impute income to the obligor for interest that could have been earned on the inheritance had it been invested in other ways.”[4] In another case, the wife who was receiving alimony saw that her inheritance was used in the calculation to modify her weekly alimony payment. The court held that, “income generated by a dependent spouse’s inheritance is no different from income generated by any other asset.”[5] In another alimony modification case, the court was obliged to consider the ex-husband’s income and the claim that the ex-wife “received a substantial inheritance in determining whether the ex-husband had made a prima facie showing of changed circumstances so as to be entitled to the discovery of the ex-wife’s financial information” in his motion to reduce his alimony payments.[6]

So, what does this mean to the person who inherited funds during the marriage and is getting divorced? If you didn’t comingle the funds with marriage monies, the inheritance is exempt for equitable distribution purposes. But, if you are likely to pay alimony or child support, the interest on the inheritance can be counted towards your support payment obligations. And for the individual who is already divorced and paying alimony or child support, a newly acquired inheritance can mean that you may be responsible for increased support payments should your ex-spouse bring you back to court.

Understanding inheritance and how it affects payments in divorce matters is important to those individuals considering divorce. The future treatments of foreseeable inheritances can be dealt with during the divorce mediation process. As an example, the divorcing couple can discuss and plan for a future inheritance during divorce mediation by agreeing to include or exclude the inheritance if and when it occurs, as well as determining in advance whether a lump sum payment amount would be more beneficial to the couple in lieu of monthly extra support payments. The idea is to plan ahead rather than engage in post divorce litigation. At Montclair Divorce Mediation, we plan ahead and try to resolve potential future conflict before an issue arises.

[1] Otsko v. Dotsko, 244 N.J. Super. 668 (App. Div 1990)
[2] N.J.S.A. 2A:34-23(B)(11)
[3] Connell v. Connell, 313 N.J. Super. 426 (App. Div. 1998)
[4] Stiffler v. Stiffler, 304 N.J. Super. 96 (Ch. Div. 1997)
[5] Aronson v. Aronson, 245 N.J. Super. 354 (App. Div. 1991)
[6] Stamberg v. Stamberg, 302 N.J. Super. 35 (App. Div. 1997)