(JD Supra) An issues that frequently arises is the treatment of an inheritance received by a spouse during the marriage. The basic rule is that any property received via gift or inheritance during the marriage is exempt from equitable distribution. When advising people, to the end of that sentence, I usually add something like, “provided that it is kept separate from marital assets.” Put another way, when an inheritance or any other exempt asset (like a premarital asset) is “commingled” (a legal term) with marital assets, it can lose it’s exempt status.
That is the basic rule, however, it is not absolute. There is a reported (precedential) decision that held that an inheritance was exempt, even though it was briefly parked in a joint account. In fact, I had a case, more than a dozen years ago, that I tried, where one of the major issues was the proceeds of a life insurance policy that my client received as a result of his brother’s untimely death. Because he was too distraught to deal with it when the check was received, his wife took the check and opened a joint bank or investment account with the money. The money was never touched thereafter but it didn’t stop the wife from seeking 50% of it when the parties divorced a few years later. In that case, the judge found that the proceeds from the insurance policy were my client’s separate property.
A similar issue arose in the case of Davis v. Davis, an unreported (non-precedential) Appellate Division decision released on October 23, 2019. In that case, the wife received $162,000 in life insurance proceeds and some other assets after her daughter from a prior marriage, died in January 2010. The money was initially deposited into a joint checking account and later, the wife opened a CD in the amount of $154,995.95 in her name alone. At the time of the divorce, the husband sought distribution of the account. The trial judge disagreed and awarded it solely to the wife and the Appellate Division agreed. Specifically, they held that:
“Assets exempt from equitable distribution may become subject to equitable distribution if the recipient intends them to become marital assets. See Weiss v. Weiss, 226 N.J. Super. 281, 287 (App. Div. 1988). The comingling of such assets with marital assets, however, is not necessarily dispositive of the issue. The assets remain the recipient spouse’s property absent evidence the
parties intended them to become marital property. See Wadlow v. Wadlow, 200 N.J. Super. 372, 380 (App. Div. 1985).
Here, the trial court found that the wife was credible that there was no intent to make the inheritance a marital asset. The concept is one of “donative intent.” Put another way, did she have the intent to gift the inheritance to the marriage, making it a marital asset. In this case, the trial court found that there was no such intent and the Appellate Division could not disrupt that credibility finding.
Even in cases when an inheritance is commingled and the court finds and/or the evidence is clear that there was donative intent, that does not mean that the asset should be divided 50-50. There are a lot of factors at play, including, proximity in time between the inheritance and the divorce. For instance, if a party deposited an inheritance into a joint account a year or two before the divorce, they could certainly make a claim for a disproportionate distribution of that asset if their argument that they should get back 100% of it doesn’t fly. The longer you go between the inheritance and the divorce, the harder that argument gets.
Moreover, some people argue that payment of income taxes on an inherited asset represents commingling. There really is no legal precedent for that. That said, their may be a claim to recoup some of the marital assets used to pay the taxes on an exempt asset.
Similarly, some people argue that the use of exempt assets during the marriage represents a commingling of the assets themselves. That too is a difficult argument. However, the use of the assets may represent marital lifestyle in an alimony analysis.