With an increasing number of divorces, questions have been raised as to how to transfer family wealth to the next generation without the fear of it being subject to division with a spouse.
Under Ohio law, separate property
that would be allocated to one spouse and not divided with the other spouse in divorce includes (1) inheritance, (2) gifts that are proven by clear and convincing evidence that it was given to one spouse only, and (3) passive income or appreciation generated from that separate property. The spouse making the claim bears the burden to prove that the property is, in fact, separate under the law.
To prove separate property that spouse must trace with evidence, documents, and testimony when and how the asset was acquired, and show that it was not comingled with any marital property. While comingling does not necessarily destroy the nature of the separate asset, it certainly makes the claim more difficult, and sometimes impossible, to prove.
To protect family wealth, the following tips should be implemented:
- Direct the inheritance or gift to the family member only and not the spouse. The inheritance or gift should not be given to the parties jointly.
- Create and use documents such as letters, cards, estate planning documents, and agreements to substantiate that the inheritance or gift is being given to the family member only. The documents should clearly demonstrate the provider’s intent to prevent a presumption of it being marital. The documents should include dates, names, amounts, and reason for the transfer.
- Maintain the received inheritance or gift in a separate account that is only titled to the family member. Do not comingle the inheritance or gift with any other property or income of any kind regardless of the account’s title. Know that under Ohio law, the holding of title to property individually or by both spouses does not determine whether the property is separate or marital under the law.
- Never deposit income or other monies into the separate account. If any monies are removed, do not replenish the account with replacement monies including income. The deposit could destroy the separate nature of the asset.
- Keep all documents that substantiate the initial transfer including the will, trust, letter, deed, copies of checks, copies of statements, gift tax returns, or any other documents surrounding the transaction.
- Keep all subsequent records for the inheritance or gift received throughout the marriage showing all appreciation including all account statements. Know that many financial institutions will only maintain records for up to 7 years and it can become cumbersome, or even impossible, to acquire documents at the time of divorce to trace the growth of the property throughout the marriage.
- Maintain all tracing documents in a protected place including a fireproof safe, safe deposit box, or relative’s home, as well as electronic backup files.
- Consider a prenuptial agreement prior to the marriage for the transfer of a business interest to protect any appreciation that could be deemed marital. If the family member is already married, consider talking to a domestic relations attorney prior to the business interest transfer to protect the greatest value possible and to establish the necessary documents to substantiate the inherited or gifted interest.
Consulting with a family law attorney prior to the transfer of any inheritance or gifts can also help prevent unintended results in the unfortunate event of divorce. While Ohio law protects inheritance and gifts as separate property, the transfer must be done strategically and remain traceable, particularly with documents.