Dear Rick:
I will be getting a rather large inheritance in the near future. I’ve been told when it is all said and done it will be about $250,000. I have a couple of questions regarding my inheritance. The first is if I get divorced, does my husband automatically get half of it? I’m on my second marriage and we have been married about three years. Things are not going great between us and there’s a strong possibility that our marriage will end in the not-so-distant future. My second question is, if I am still married and my husband files for bankruptcy just for himself, do I have any liability for his debts?

Thank you.

S.L.

 
Dear S.L.:
The key with the inheritance is how you handle the money. If you add the inheritance to a joint bank account and use the money to cover joint family expenses such as paying down the mortgage, (if the house is jointly owned) then over time the money does become more joint money, and in a divorce, there’s a strong possibility that your husband would be able to share in those amounts. On the other hand, if you keep the money separate and distinct from your other assets and do not use it for joint family expenses, then in a divorce situation that money will, in the great majority of cases, not be part of any divorce settlement. Thus, you would be able to keep it without having to share it with your husband. The key is not to comingle your inheritance with other monies or investments that you have. The money from your inheritance should be kept separately in your name and only in your name.

With regard to the second question, your husband’s liabilities are not your liabilities. Therefore, if your husband did file for bankruptcy and all the debt that he’s seeking relief on is in his name and only his name, then you are not responsible. Where people run into trouble is when the underlying is in both parties’ names.

If the debt is in both parties’ names then you could be held liable for the entire debt. For example, if your husband had a charge card that you were both owners of and your husband was the only one who ever used that charge card. If he had an outstanding balance of $25,000 and that was discharged in bankruptcy, the credit card company could not seek payment from your husband they would be precluded because of the bankruptcy. However, the charge card company could seek the full $25,000 from you. It may not seem fair that he would be free of the debt and you would have to pay it; however, that is the way it works. Therefore, the key in determining if you can be held responsible for your husband’s debts in bankruptcy is if you were a co-signer. If you were, then you are responsible. On the other hand, if you were not a co-signer, his bankruptcy will not affect you.

One last note, if you want to keep your inheritance separate and distinct from other family properties, one thing you should consider doing is make sure you use separate money to pay any taxes that that money would generate. Typically on the inheritance itself, you won’t pay any taxes unless the money comes from a qualified account, such as an IRA or on an annuity. However, on a year-by-year basis the money may produce some taxable income and it would be smart to pay that tax with the separate funds. By doing so you are building a case that this money is separate and distinct from family assets and that can be invaluable to you in cases of divorce.

Good luck!
If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.