What Happens when an Asset Appreciates?

When You’ve Used Separate Funds and Marital Funds

While you’re likely to get separate funds that you’ve invested in a home, you may have to split equity that was accrued after the marriage. If your relative passes away and leaves you an inheritance, that inheritance is generally considered to be separate property, meaning your spouse wouldn’t have an interest in it in the event of a divorce. Marital funds would refer to any income generated during the marriage, with very few exceptions. So, if you use your paycheck—that you earned during the marriage—to cover the mortgage payment, you used a marital fund. Paychecks are almost always considered to be marital assets even if you maintain completely separate finances. A common exception to this rule is when the parties have a prenuptial agreement that identifies what income is to be considered marital and what income is to be considered separate property.

Who Gets the Appreciation?

So, if you use your $100,000 inheritance as a down payment on a $200,000 house, your ex wouldn’t likely be entitled to that $100,000. However, they would have an interest in the rest of the equity in the house. In some states, this means that the remainder of the equity would be split 50/50. In other states this means that the equity would be split equitably between both parties. Equity includes appreciation, so even though your inheritance may be the reason that you and your ex were even able to get the house in the first place, they would still have an interest in the equity, especially if they’ve contributed to the appreciation of the property—which they typically have, as most people do put financial effort and physical labor into improving and/or maintaining an asset such as real property or a vehicle.

What About Unjust Enrichment?

Is it unjust enrichment if we used my inheritance to pay for a house and then my spouse gets to benefit from the appreciation? While it may sound like unjust enrichment, it’s not quite the same thing. In order to have a claim for unjust enrichment, your spouse needs to benefit at your expense. While you did put up the down payment, you would be getting that back—assuming you aren’t upside down on the house. Even if your spouse was a stay-at-home spouse, you still wouldn’t be able to claim unjust enrichment. This is because while you did pay for the home using money you earned, marital funds are considered to be property of both parties, not just one party. In other words, you can’t claim unjust enrichment when you used marital funds to cover the cost of a mortgage payment because that’s your spouse’s money too.

How Can I Make Sure S/he Gets Nothing?

A prenuptial agreement can mitigate your financial exposure in the event of a divorce. However, a prenuptial agreement cannot eliminate your financial exposure in the event of a divorce. While a prenuptial agreement can help keep separate property separate, there’s no guarantee that it can completely prevent your spouse from benefiting whatsoever from your contribution. Prenuptial agreements are designed to protect both parties. You cannot have a prenuptial agreement that would cause the other person to become destitute or reliant upon the state. If a prenuptial agreement is too beneficial for one party, it may be challenged and it may even be thrown out in court. There are other ways to keep your inheritance separate from your child’s spouse or your own spouse. It may also be helpful to put the money or other assets in a trust, which could help keep inheritance out of your spouse’s reach in the event of a divorce.

When You Get a Windfall but You and Your Spouse Don’t Get Along

If you get a windfall, be it from an inheritance, gift, personal injury settlement, or some other source, you may need to consult an attorney—especially if you and your spouse are on the verge of divorce or are struggling to make a marriage work. An attorney can help you understand your rights and give you specific instructions on what you can do to reduce your financial risk in the event that you and your spouse decide to divorce. Whatever you do, do not assume that you can just put the money in an account or leave the asset in your name alone and call it a day. The laws vary greatly from state to state and simply putting money in a separate account may not offer adequate protection, depending on how you acquired the asset.