One of the more complex issues we see when addressing alimony and equitable distribution relates to inherited assets and the money (distributions, investment experience, interest, etc.) that emanates from them. Under New Jersey law, inherited assets remain the exempt, separate property of the spouse who inherited same. It cannot be distributed in whole or in part to the other spouse in the event of a divorce. See N.J.S.A. 2A:34-23(h).
However, there is an exception to every rule. If an asset is commingled with a marital asset, then it loses its exempt character. For example, if Husband received $100,000 from an inheritance and he deposited into the joint bank account he shares with his Wife, then that inherited money is no longer exempt because it was commingled with a marital asset. Depending on how much time has passed since the inherited money was deposited, and based on other factors, there may be an argument that the account itself should not be split 50/50 based on the deposit of the inherited money. But by commingling the funds, the Husband has lost the clear-cut argument that the inheritance is not to be shared by his Wife.
Importantly, even if an inherited asset is immune from equitable distribution, this does not mean it is unavailable for support purposes. A court could consider the existence of the separate, exempt asset, and the income generated therefrom , for purposes of determining appropriate support.
The recent unpublished (non-precedential) decision of Rosen v. Rosen provides a straightforward example of this issue in practice. In Rosen, the Husband received a significant inheritance during the marriage, in the form of a Trust. He received this inheritance together with his brothers, and eventually they converted the Trust into an entity they called “Leonard Rosen Family, LLC.” During the marriage, the Husband took distributions from the entity, which he would at times deposit into accounts he shared with the Wife, or use for expenses he shared with his Wife. However, the Wife herself held no ownership interest in Leonard Rosen Family, LLC. This is the critical fact. While the Husband commingled certain funds generated from the entity, the Wife never obtained an ownership interest and it remained his separate property, or so he believed. The trial judge did not agree with the Husband, and awarded the Wife an interest in the distributions the Husband would take from the entity in the future, as and for her equitable distribution of this asset.
However, the Husband ultimately and correctly prevailed. The Appellate Division reversed the trial judge’s ruling and agreed with the Husband that because his ownership interest in the entity was derived from an inheritance, his interest in that entity and in any income generated from it was not subject to equitable distribution. In reaching its decision, the Appellate Division relied upon one of the seminal New Jersey Equitable Distribution cases, Painter v. Painter, which held that:
[T]he income or other usufruct derived from [exempt] property, as well as any asset for which the original property may be exchanged or into which it, or the proceeds of its sale, may be traceable shall similarly be considered the separate property of the particular spouse.
Painter v. Painter, 65 N.J. 196, 214 (1974).
The Appellate Division (and the Husband himself) did acknowledge that certain income generated from the exempt property had been commingled, and that there were – to put it simply – “no backsies.” The money that the Husband had placed in joint bank accounts that had emanated from the exempt entity could not be recalled by the Husband, nor did he ask for it to be.
Finally, the Appellate Division acknowledged the prior case law (Miller v. Miller, 160 N.J. 408 (1999) and Aronson v. Aronson, 245 N.J. Super. 354 (App. Div. 1991)), which held that income from separate property can be considered in determining an alimony award. However, the Court did not delve into this analysis in any greater detail, as the Wife did not seek alimony in this particular case. One interesting issue that could conceivably arise related to alimony relates to the marital lifestyle. If you have a case where the recipient of alimony claims that (s)he cannot meet the marital standard of living, but subsequently the payor receives an inheritance, there could be a sufficient change of circumstances that enables the recipient to seek more support to allow him/her to live closer to the marital lifestyle. After all, the other spouse now has the ability to do so as a result of inheritance.
All of the above are important factors to consider when you or your client is lucky enough to have benefited from an inheritance or a trust during the marriage, or after.
Jessica C. Diamond is an associate in the firm’s Family Law Practice, resident in the Morristown, NJ, office. You can reach Jessica at (973) 994.7517 or firstname.lastname@example.org.