Every year I work with clients who have been gifted or inherited small to large sums of money. Some of these individuals have been married for years and some have been married only a brief time, but my advice is always the same. Do not commingle it. When you divorce in the state of Texas, the presumption is that anything you own at the date of marriage is considered community property. Community property is split between the spouses. The only way to overcome the presumption of community property is with clear and convincing evidence that the property is of separate nature.
Gifted and inherited money should be treated with a special regard. The money you receive from a loved one is generally intended to benefit you. When that money is combined with other funds, specifically those of a community estate, they can quickly lose their character. They can also be expended on items that never allow you to recoup the monies in the event of a divorce.
Whether you are the giver or the receiver, there are some very simple steps you can put in place to help protect the money that was intended to benefit you or your loved ones in the case of divorce. These steps may not align perfectly with investment strategies so it’s imperative that you work with an investment advisor who is knowledgeable in the area of separate and community property or ask a CPA/attorney who is well-versed in those areas to help the investment advisor understand the rules.
- Ask the giver or the person leaving you inherited money to be clear and concise about who the funds belong to. If their intention is to gift you and your spouse, make sure that is known. If their intention is to only gift you, make sure that is known as well. Keep copies of checks or letters concerning the gifts in your file.
- Deposit gifts or inheritances into a separate account in your name. Trying to avoid commingling of funds is the ultimate goal.
- Have any income that the account above earns (interest, dividends) transferred to a joint account instead of letting it sit in the inherited account causing commingled funds. Since interest and dividends earned during marriage are considered to be community property in Texas, depositing them back into the account holding the money will cause comingling of the funds.
- Avoid investments that produce interest and dividend income if possible. Capital gains distributions retain their separate property character. Ask your investment advisor for investments that meet this goal.
- Try to avoid using funds in a separate account to pay for community type expenses. (i.e. everyday living expenses). You may not be able to recoup the expended funds.
- Revocable Trusts. Revocable trust can be a great tool to help safeguard separate funds but have a set of rules all their own. Due to the legal complexities of these entities, they are beyond the scope of this article. If you would like to discuss the use of a revocable trust to safeguard your gifted or inherited money, connect with our CPA firm so we can get the right attorney involved.
The act of protecting your gifts or inheritance does not always match the goal of growing your money. It’s important to work with a team of professionals to ensure your goals are accomplished. At Divorce Strategies Group we work with a multitude of attorneys and our sister forensic firm SHFD Forensics when forensic accounting is warranted. If you would like more information schedule a consultation today.