16 Nov Protecting inheritance before marriage
Q. My sister is getting married to someone I don’t trust. She inherited some money from our parents and I’m thinking she should get a pre-nup. She doesn’t want to. How I can get her to change her mind?
A. We’re glad to hear you’re trying to look out for your sister.
There is some good news if you can’t get your sister to change her mind.
Premarital inheritances are not subject to an equitable distribution by her spouse, said Lynne Strober, chair of the matrimonial and family law practice at Mandelbaum Salsburg in Roseland.
“Inheritances received by one spouse only, before or during a marriage, are not subject to equitable distribution,” she said. “This is provided the inheritance was only to her and not to both of them.”
But your sister needs to be sure of one thing.
“Your sister needs to keep the inheritance in her name alone and never commingle it, meaning, that she cannot put it in joint names with her spouse,” Strober said.
There’s also some bad news.
If the inherited funds are used to maintain a marital asset such as adding an addition to a jointly owned marital home, then the use of the funds may be construed to be a gift to the marriage, Strober said.
Similarly, if the inheritance is used to pay for a vacation, your sister will have a difficult time seeking a credit for the money spent, she said.
There are other intricacies involved with the inheritance.
Income from all sources can be considered in assessing a party’s ability to pay alimony and child support, Strober said.
“Therefore, your sister’s funds can be considered,” she said. “The corpus of the inheritance will not be the subject of an alimony claim, but the interest that it throws off will be considered.”
She said the inherited funds may be income producing or can be presumed or imputed to throw off income.
“So if your sister purchased an expensive painting with the inheritance and there was no income generated, her spouse could still make a claim that income should be imputed on the sum spent,” Strober said.
If the funds were used to purchase a rental property, Strober said, the rental income could be considered and there would be an argument about the funds used to purchase the property.
There’s also an issue if a joint tax return is filed during the marriage and income earned by either party was used to pay the taxes on the income that the inheritance produced. Therefore, she said, the inheritance or other separate funds should pay the taxes on the income so marital money is not used.
Another approach is to put the funds in a discretionary trust and appoint a cooperative trustee, Strober said.
“That insulates the corpus. There is an issue if the distributions from the discretionary trust are used to enhance the marital lifestyle,” Strober said. “There is case law saying it can’t be considered for alimony purposes but the language in the case creates an opening for the argument that it could be considered.”
Also, she said, case law could change as to the consideration of the proceeds from a discretionary trust that are used by the parties to pay for the lifestyle of the marriage.
Strober said the best way to deal with your concerns is for your sister to have a well-drafted prenuptial agreement prepared. It could be limited to only the inheritance issue, or include a waiver of all potential claims with regard to not only the inherited funds, but all issues, except for having the income considered for purposes of child support, which can’t be addressed in a pre-nup.
“By entering into a prenuptial agreement, the worrying will be reduced and her spouse will have a chance to show he or she is well intended by agreeing not to make a claim as to her premarital inheritance,” Strober said.
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The post was originally published in November 2017.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.