If you have a trust fund or received an inheritance – whether before, during, or after your marriage – one of your big concerns when it comes to separation and divorce is probably how to adequately protect that asset.
For many families, divorce marks a major turning point in their lives, especially as it relates to their personal finances. We often say that, although the statute on spousal support specifically provides that ‘the standard of living established during the marriage’ is something that the court will contemplate, but, at the same time, it’s very difficult for both parties to maintain the SAME standard of living after divorce that they enjoyed beforehand.
For one thing, rather than maintaining just one home, you’ll have to maintain two – so, two separate rent or mortgage payments, two separate internet, electricity, water, and gas charges. There may even be child and/or spousal support awarded, which can further complicate people’s post-divorce finances, making it more difficult to qualify for a mortgage or a rental property.
Not only that, but factors beyond your control – like the real estate market and interest rates – can combine to create a situation that is economically difficult.
If you have access to a trust fund or an inheritance, you’re probably more grateful for that money now than ever, and with good cause.
Under Virginia law, we divide property into three separate categories: property is either separate, marital, or hybrid.
Separate property is anything earned, purchased, or acquired prior to the marriage, or anything given to one of the parties by someone other than their spouse, and inheritances in one party’s sole name.
Marital property is anything that was earned, purchased, or acquired during the marriage, regardless of title.
So, to determine whether property is marital or separate in nature, we look at WHEN it was earned, purchased, or acquired, and HOW it was paid for. In the case of both a trust fund and an inheritance, it’s generally considered separate property – because, regardless of whether you came into the money after your marriage, it’s not something that the two of you earned together during the marriage. It’s something that would be yours regardless of your marital status; it’s not something he participated in helping you to earn and, as a result, he has no interest in it.
Unless.
Hybrid property is part marital and part separate, and we often see this in bigger assets, like real estate. We talked about a real estate example the other day when we talked about hybrid property, so I’ll look at it again, but from a different angle.
Let’s say you got married and bought a house. You made a $50,000 down payment together, and you paid the mortgage together with marital money for the first five years of your marriage. Then, your grandmother died and left you some money. You used $250,000 of the money to pay off the remaining loan balance, so there’s no further mortgage on the property. You also used another $50,000 of the money to make various improvements around the house.
The first part – the down payment and the mortgage payments – are clear. These are marital contributions and will be divided between the two of you during the divorce.
The other part – the $250,000 that paid off the mortgage, and the $50,000 for various improvements – came from your inheritance. You’ll likely have to prove that this is the case, but that shouldn’t be a problem. You can likely obtain a copy of the will or trust documents that left this money to you, and can likely also show how that money was transferred into your account and, from there, that the same payment was applied against your existing mortgage balance.
Both the $250,000 and the $50,000 for improvements are your separate contribution. So, too, is any increase in equity associated with those payments. Let’s say your $50,000 in improvements added $100,000 to the value of the home. That total additional $100,000 would be yours separately, as well as the $250,000 that paid of the loan (and associated appreciated value).
Commingling: The biggest concern with inherited and trust fund money
In general, its best practice to keep your separate funds separate, rather than commingling them in with marital money. The home is sort of an exception because it’s so easy to trace where those contributions came from and how they were applied.
In the event, though, that your inherited or trust fund money went directly into a marital account and then – essentially – disappeared, you may have a tracing issue. If you put, say, $50,000 into an account that has $300,000, and then you buy things and pay bills and live your life, it might be hard to say later that you should be able to take your separate $50,000 back out again. Who’s to say that’s not part that was already spent?
Likewise, if you SPEND your money on things that don’t have much (or any) value, like paying bills, paying off debts, or just buying general consumer goods, it’s probably all gone. A common thing that I see in these types of cases is that the more well-off spouse pays off debts for the other spouse. That is going to be considered a gift, and not something that you can take back out in the event of a divorce.
You should be very careful how you commingle your separate money with your spouse’s. If at all possible, keep it in a separate account.
Trust Funds and Virginia Divorce
Trust fund money is handled similarly, though it might look different in the sense that you receive a certain amount of money each month or year rather than one lump sum. In a best-case scenario, you’d keep this money separate.
I’ve seen trust fund money become an issue, particularly in cases where there’s a spousal support concern. Even if you’re otherwise the lesser earning spouse, it’s possible that your trust fund could disqualify you from RECEIVING spousal support (remember, the first prong of the test is need versus ability to pay).
Your interest in the trust fund is separate, so your spouse should not be able to request spousal support from you on the basis of your trust fund alone. He has no entitlement to that money since it’s not marital in nature.
There are always facts and circumstances that differ in each case, so it’s a good idea to talk to an attorney one-on-one about the details in your specific case, to make sure that you get the best advice possible.
Protecting your trust fund or inherited money isn’t impossible, but you’ll want to make sure you take steps to avoid commingling that money. Always remember that being able to trace it back to the separate source is critical. Tracing issues can be expensive to resolve, so you want to make sure that the origin of the money is clear.
For more information, give our office a call at 757-425-5200 or visit our website at hoflaw.com.