Today wanted to share with you a quick video I put together on how to protect inherited assets from your spouse in the event you are going through a separation or divorce in North Carolina. Here is the video, followed by a transcript if you would rather read along.
How to Protect Inherited Assets from Your Spouse
Today I’m doing to share with you what you need to do exactly to protect your inherited property if you’re going through a separation or divorce. My name is Jim Hart. I am the owner of the Hart Law Firm and this is the Ask a Lawyer show, the best YouTube show on the internet for everything related to divorce, family law, personal injury and estate planning.
So today I want to talk to you about what you need to do if you’ve inherited property, and how you should protect that property in the event that you’re going through a separation or divorce. First thing you need to know, this is specifically for people that are in North Carolina. If you live somewhere else, these laws may not apply. But if you live in North Carolina and you’re going through a separation or divorce in North Carolina, then there are very specific rules related to how inherited property can be treated in North Carolina if you’re going through a separation and divorce.
The first thing you need to know, excuse me, just let me get a little sip here. I need to warm that coffee up. First thing you need to know is that in North Carolina inherited property is defined in the statutes as separate property, and separate property the court has no jurisdiction to divide it. That means that if you inherited $100,000 in an investment account or perhaps you were listed as a beneficiary on a IRA from a relative and you receive that money after they pass away, that money is going to be your separate property as a matter of law. That means that the family court, if you’re going through a separation and divorce, has no jurisdiction to divide that property.
By jurisdiction we mean that they don’t have the legal authority to go in and look at that account and make a division of that. Now, there are some exceptions, and this is where people make the big mistakes. The first exception is let’s say you take some of that property and you commingle it with your other accounts. Well, in that situation if you can’t trace that money back out of that account, then that is going to become marital property.
So for instance, if you took that $100,000, you added that $100,000 to another investment account that you had, and you bought a bunch of stocks with it, maybe mutual funds that have been bought and sold and reinvested over the years, then it’s going to be very hard to figure out what portion of that money was your original investment account from your inheritance, and what portion of that money might have been marital funds. Then in that situation, you’re basically commingling that and it’s going to be difficult. The court’s not going to be able to divide that.
Another example of how this could be problematic for you is if you take that money from that separate property, and you start buying marital funds with that money. Let’s say you take that money from your investment account that you inherited, and you start buying, paying for marital expenses with that money. Well then you’re basically commingling that or converting that money to marital funds, and now the court does have jurisdiction to make divisions there.
Now a third way this can become problematic for you is if you take this investment account that is your sole investment account, and you start depositing, let’s say, your paychecks into it. Your paycheck, by virtue of the fact that it’s earned during the marriage and before separation is considered marital property. So if you take that marital property and deposited it into your investment account, and you just start investing in there, you’re basically reverse commingling. You’re putting marital funds into that investment account that was your separate property, and now all of a sudden it becomes difficult and harder and harder to trace where that money is from.
Basically what North Carolina does is they follow what’s called a source of the funds rule, and what that means is they’re going to look to where the source of the funds were and that’s how they’re going to treat it. So, if the money came from your paycheck, it’s going to be considered marital. If it came from an inheritance, it’s going to be considered separate. But if you start commingling those and it becomes more and more difficult for the courts to figure out what is marital and what is your separate property, then the court’s not going to be able to divide that.
What do you need to know? A couple of things you need to do if you inherit some money and you want to make sure you protect that money. Number one, if you don’t do anything with it and you leave it sit in the investment account where you inherit that money from and it’s in your name only, you may want to change the name of that, that investment account to your name. You can title it as inheritance account or something like that. See if the bank will let you do that. Then you know that that’s your inheritance account. It’s separate. You don’t have a problem there.
You can put it into a trust that stays in that trust for your benefit. You can put it into an irrevocable trust if you wanted to, and you’re not going to be able to get that money out except for in certain situations, but that would protect the money in the event of divorce, so long as you don’t put any marital property into that account.
So those are some of the things you can do to protect it. Also you need to make sure you don’t take that money and put it into a joint checking account or another account that is a marital account. Now the title of the account doesn’t matter, so whether there’s a joint account or your individual account, if you earned the money that’s in there during the marriage, and you put the money in during the marriage, then that is going to be a marital account. So don’t take money from your investment account that’s from your inheritance and put it into either your account, your spouse’s account or a joint account, because that’s commingling.
Number two, don’t take money from those accounts and put them into your separate property account. That’s also a problem. So basically, what you need to know about all of this, the biggest thing here is don’t commingle everything. Don’t put money from your marital accounts into your separate accounts, and don’t put money from your separate accounts into your marital accounts. If you do that, you’re going to stay safe. You’re not going to have a problem. But if you start to deviate from that rule, then you are going to run into problems.
The other thing is if you do end up separating and divorce, that money that’s your inheritance is not subject to distribution. It’s not subject to equitable distribution in North Carolina. So I’ve seen many people come to me where they’ve already split accounts that they inherited with their spouse, even though they should never have done that, and so that is a big mistake that I see that we can help you to protect against.
Anyway, that’s it for today. Hope this helps you. If you’ve got an inheritance account and you’re trying to figure out how to protect it if you’re going though a separation or divorce in North Carolina, this is how you do it. Or, even if you’re not going through a separation and divorce, and you just want to figure out how to make sure you protect your inheritance so that your spouse doesn’t get it in the event that somewhere down the line you would need to go through a separation and divorce, this is what you need to do. You keep the money in a separate account and you don’t commingle it. That’s how you do it.
That’s it for today. Have a great day folks, and we will be back again next time with another exciting episode. Take care.