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| The Basics | Why an inheritance is a 'yours,' not 'ours'
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Though sharing may seem fairest, there are many reasons to keep windfalls separate -- and many ways to limit the damage to your marriage.
By Liz Pulliam Weston
Married people who receive an inheritance face a particularly difficult and complex decision: Should you share the windfall with your spouse?
Some assume, incorrectly, that the law requires them to share. Others can't imagine splitting up their finances into his-and-hers pots. Still others would love to have money of their own, but fear their spouses' reactions.
There are powerful reasons, however, why you might want to keep an inheritance separate.
Ann Perry, a San Diego writer, faced the issue more than 10 years ago when her mother died, leaving her all her assets. Perry's lawyer strongly encouraged her to consider keeping the inheritance legally separate. But she struggled with the idea of not sharing with her husband of 14 years, with whom she shared a last name, a home and two children.
"It's a very tough decision," said Perry, a personal finance columnist and author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance. "For some people, it can actually threaten the marriage."
Wealth is about to pass on to boomers
A growing number of couples will struggle with this dilemma as the baby boomers begin to inherit the tremendous wealth accumulated by their parents' generation -- and as the boomers die and leave an even larger legacy to their children. (Two Boston College economists have estimated between $41 trillion and $136 trillion will be inherited by 2050, with most of the money bequeathed by the boomers.)
Legally, spouses can keep inheritances as separate property, even in community property states where nearly all other income received during marriage must be divided equally. Good reasons to segregate an inheritance, according to financial and estate planners, include:
- Divorce. Many marriages fall apart, and you could lose a big chunk of your bequest in the process if you haven't kept it strictly separated. "You have to be aware that the divorce rate is about 50%," said estate planning attorney Jon Gallo of Los Angeles. If you divorce, "your ex is going to be thanking you for the nice gift."
- Death. How would you feel about your spouse's next spouse's kids winding up with your money? Dumping it in the communal pot can give you less control over where it goes when you're dead.
- Deference. The person who gave you the money had the choice to name your spouse, too -- and didn't. Keeping the money separate can be a way of honoring the donor's wishes. "You can think of (an inheritance) as an heirloom, something that has special meaning to the inheritor," Perry said. "They might want to keep it in the family."
- Desire. Some people simply want money or property to call their own.
"Maybe in her background, there's divorce, and she wants to have something in her back pocket," said Perry, who interviewed several inheritors for her book. "But her husband might feel, 'I've been providing for the family all these years and now you're saying you don't want to share?'"
Anger, resentment and mistrust are, in fact, common reactions when a non-inheriting spouse hears the other might want to keep an inheritance separate. Is the inheritor planning on a divorce? What happened to share and share alike? How can the couple function as a team if it doesn't pool its resources?
Does the balance of power change?
Inheritances also can drastically change the balance of power in a relationship.
"It can turn somebody who has been meek and mild in the marriage into someone who feels quite liberated," Perry said. "It can lead to some changes in the marriage."
Some unions can survive this change and conflict; others can't.
For Bruce L. Richman, partner in charge of BDO Seidman's Matrimonial Consulting Group, that's all the more reason for not sharing. Then again, he specializes in trying to untangle divorcing couples' finances.
"The clearer you can keep it separate," says Chicago-based Richman, author of the "J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce," "the better off you'll be."
It's not impossible to get some of your commingled inheritance back in a divorce, but it can be expensive and may require professional help known as forensic accounting. Richman's firm charges up to $600 an hour to trace marital assets back to their sources.
State law plays a big role
State law also influences how your inheritance is treated once you've shared it, and the rules can vary dramatically across the country.
"Every state has differences and nuances" about how a shared inheritance will be treated, said Blanche Lark Christerson, a director of Deutsche Bank's Wealth Planning Strategies Group in New York. "It would be foolhardy to say there's a blanket rule."
As if divorce rules weren't complicated enough, you have to add in the complexities of estate planning.
How you hold an inheritance can affect your estate tax situation. Sometimes, holding separate property can be a bonus when trying to reduce future estate taxes (assuming the estate is large enough), and sometimes it can be a detriment. It all depends on the details of your financial situation -- which is why inheritors should consult with a qualified estate-planning attorney for advice before deciding whether to share.
Perry ultimately decided to share her inheritance with her husband, in part for estate-planning reasons. Since then, however, the estate-tax rules have changed and nullified much of the benefit the couple was expecting. (Perry said she still believes sharing was, for her, "the right thing to do.")
Even if you have the most stable marriage and can't imagine ever splitting up, you do need to face the possibility that, if you die first, your spouse may remarry. Once you've commingled funds, you may be limited in how much you can leave outright to your children or other heirs -- which means when you die, your wife's next husband, or his kids, could wind up with the bulk of the loot.
You can retain some control over who gets what's left of your inheritance by setting up a trust to ensure the money goes to the heirs you choose after your spouse dies. The problem with trusts, though, is that they tend to set one generation against another. Your kids have to wait until your spouse dies to get the money, and conflicts often arise over how the money is invested and used in the meantime.
Obviously, you'd be smart to get professional help with these decisions, and you'll probably need to have some heart-to-hearts with your spouse. If you're on the fence about whether or not to share, therapist and heiress Thayer Willis suggests the following:
Don't let anyone push you. Keep the money separate until you have investigated your options and are emotionally ready to make a choice, says Willis, author of Navigating the Dark Side of Wealth: A Life Guide for Inheritors and daughter of the co-founder of whats now the Georgia-Pacific Corp., the lumber and paper giant. Don't be prodded by a spouse, family member or advisor into doing anything you're not ready to do.
Don't keep secrets. Some inheritors are tempted to keep the details of their financial lives to themselves, convinced that it's the only way to avoid conflict with their spouses. But Willis believes that secrets about money can destroy trust in a relationship. Discuss the inheritance openly with your spouse, she advises, and ask him or her to attend any financial or legal meetings you have with advisers about the money.
Balance the power. Keeping an inheritance legally separate isn't the same as being unwilling to share. In fact, if you opt for separate property treatment, Willis says it's up to you to take some steps to reassure your spouse and restore confidence in the union -- which typically means sharing some of the windfall. Some strategies:
- Pay down debt. This is a good use of a windfall in any case, but especially when doing so would free up money that both of you can spend.
- Help your spouse save. You might consider paying more of the bills, for example, so that your spouse can sock more money into a 401(k). Helping a spouse build assets is a way to offset the inequality of your having a bigger financial cushion.
- Invest in your family. Look for ways to increase earning power. You could launch a business, help your spouse get an advanced degree or send your kids to college. You also could invest in shared assets by paying for improvements on your home, for example.
- Give an outright gift. You could give a chunk of money for your spouse to hold separately. One inheritor Perry interviewed put their home in her husband's name alone. You'll want to talk to an estate-planning attorney about the gift tax ramifications.
- Treat your family. There are plenty of ways to use your windfall to benefit your family, including using some of your inheritance to pay for trips, vacation homes and other luxuries.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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