> Proper advice and planning can protect inheritances from creditors, bankruptcy and divorce.
> Non-marital property that is commingled with or treated as marital property will also be subject to equitable division upon divorce.
> While divorce is a possibility that is difficult to anticipate, it can be planned for.
Kurt Cobain, singer and guitar player of the seminal rock band, Nirvana, died in April 1994 of an apparent suicide. He was survived by his wife, Courtney Love, and daughter, Frances Bean Cobain, who was born in 1992. Frances, now 23 years old, recently filed for divorce from her husband of less than two years, Isaiah Silva, a 31-year old aspiring musician. Frances is seeking to shield her inheritance, reportedly valued at $450 million, under the laws of California. While Frances has tried to preempt Isaiah’s pursuit of the inheritance, she has offered to pay spousal support. Unfortunately, the inheritance left to Frances was not better protected and may serve as a bargaining chip for Isaiah.
Non-Marital Property
While marital property laws vary by state, non-marital property is generally that which is considered to be the property of one spouse, rather than both spouses. Unlike marital property, upon divorce, non-marital property is not subject to equitable distribution between the spouses.
Illinois law defines non-marital property as follows:
1. Property acquired by gift, legacy or descent;
2. Property acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift, legacy or descent;
3. Property acquired by a spouse after a judgment of legal separation;
4. Property excluded by valid agreement of the parties;
5. Any judgment or property obtained by judgment awarded to a spouse from the other spouse;
6. Property acquired before the marriage;
7. The increase in value of property acquired by a method listed above; and
8. Income from the property acquired by a method listed above, if the income is not attributable to the personal effort of a spouse.
Property acquired by either spouse during marriage is considered marital property. Additionally, non-marital property that is commingled with or treated as marital property will also be subject to equitable division upon divorce. This is where failing to consult an attorney can become very expensive.
While it is unclear whether Frances commingled her assets with Isaiah or invested her inheritance in any joint property or accounts, keeping her inheritance in a separate account would have shielded the assets from a claim by Isaiah. The use of a trust, which also allows the grantor—in this case, Kurt—to set the terms of distribution and ages of withdrawal is the ideal arrangement for leaving such an inheritance.
Protecting Inheritances from Divorce
Divorce is a possibility that is difficult to anticipate, but one that can be planned for through proper estate planning. The Illinois Marriage and Dissolution of Marriage Act (the “Act”) provides that although property acquired by gift, legacy or descent is considered non-marital property, when an individual transfers non-marital property into some form of co-ownership with his or her spouse, the property is then presumed to be marital. In other words, an inheritance is considered the separate property of the beneficiary so long as it is handled properly. Failing to understand the requirements for keeping property separate and to plan accordingly can subject (a) an inheritance you receive to your own divorce or (b) an inheritance you leave to the beneficiary’s divorce.
Court decisions give us on-point examples of the consequences of failing to plan. When inherited assets are used to purchase a jointly-titled home or invested in a joint account, the inherited assets are no longer protected. Upon divorce, the property would likely lose its non-marital status, thus subjecting it to equitable distribution unless the owner could show by clear and convincing evidence that he or she did not intend to make a gift of the property to the spouse. This is a difficult standard to meet.
Making a gift or bequest through a Revocable Living Trust or an Irrevocable Gift Trust can protect your assets from a beneficiary’s divorce. Such trusts allow the assets to be managed by the trustee until your beneficiaries are of an age when they are responsible enough to manage such assets themselves or consult an attorney who will advise them on how to hold the assets. Additionally, through the trust document, a trustee can be empowered to protect trust assets from the beneficiary’s creditors or bankruptcy.
In Kurt’s case, leaving his assets to Frances in trust could have protected the assets from even being targeted by Isaiah. While Frances may be successful in retaining her inheritance in divorce court, Isaiah is likely to seek a larger amount of spousal support or share of marital assets due to size of Frances’ inheritance. Although no one expects their own marriage or the marriage of a child to fail, it is a real possibility that must be considered. By surrounding yourself with the right advisors and through proper planning, gifts and inheritances can be protected.