How To Keep A Spouse Out Of Your Inheritance

Many parents and grandparents spend their entire lives building wealth with the intention of eventually passing it on to their children or grandchildren. The last thing they likely want is for those assets to instead be squandered by an heir's spouse or lost altogether in a contentious divorce. One of the biggest reasons inheritances can end up in a spouse's hands is through commingling. This occurs when assets originally intended for one person are mixed with marital finances, which often happens unintentionally. For example, commingling can happen if inherited funds are deposited into a joint checking account or if they are used to pay for an asset, such as a home, that is owned by both spouses. In these situations, assets that were intended to remain separate could instead end up as shared, marital property. This means that, in the event of a divorce, a spouse could be entitled to a portion of those assets. 

Inheriting assets from a relative can become a major headache if the assets aren't handled properly from the start. The good news is that there are ways to help prevent this from happening. Tools such as prenuptial agreements and trusts can help keep inherited assets separate from spouses, ensuring they end up with the people they were intended for.

A prenup is a binding legal document, signed before marriage, that spells out how assets will be divvied up in the event of a divorce. In the case of inherited assets — whether that is money, real estate, a business, or some other investment — a prenup can ensure these remain separate property. For those already married, and without a prenup at the time an asset is inherited, considering a postnuptial agreement may be a good idea. Muck like a prenup, a postnup provides instructions on how assets will be divided up in a divorce.

Another way to help protect an inheritance from a spouse is by placing the assets in a trust. An irrevocable trust can be particularly effective at keeping assets separate. These trusts, in which the grantor sets the terms for how and when the assets will be distributed, generally can't be modified once they're created — making them effective at protecting assets. That said, commingling can still occur if the assets aren't handled properly, which is why it's important to keep them separate from personal accounts. For those looking to create a trust that allows assets to continue to pass down to future generations, a dynasty trust could be a good option. These irrevocable trusts are designed to keep assets within a family — and therefore protected from future spouses. As the great wealth transfer continues to unfold over the next few decades, more beneficiaries will need to understand how to keep inherited assets protected.