How Divorce Affects Inheritance Rights in New York

Divorce brings significant emotional and financial upheaval, often raising complex questions about asset distribution. One of the most common concerns that clients at the Law Offices of Diron Rutty, LLC have is whether their spouse is entitled to their inheritance.

Under New York law, the general rule is reassuring: inheritances are typically classified as separate property. However, this protection is not absolute. Without careful planning and strict financial boundaries, what was intended solely for you could become part of the marital pot. Furthermore, failing to update your estate plan after a divorce can lead to unintended consequences, such as an ex-spouse remaining the beneficiary of your life insurance or retirement accounts.

Understanding how divorce affects inheritance rights is crucial for protecting your financial legacy. Our guide explores the legal landscape in New York, the risks of commingling funds, and the essential steps you must take to secure your assets.

Understanding Separate vs. Marital Property

New York is an “equitable distribution” state. This means that during a divorce, the court divides property fairly (though not necessarily equally) based on various factors. To determine what gets divided, the law distinguishes between two types of assets: marital property and separate property.

Marital property includes most assets acquired by either spouse during the marriage, regardless of whose name is on the title. Separate property, as defined by Domestic Relations Law § 236(B)(1)(d), includes:

• Property acquired before the marriage.
• Compensation for personal injuries.
• Property acquired by bequest, devise, or descent (inheritance) or gift from someone other than the spouse.

Because inheritances fall squarely into the definition of separate property, they are generally immune from equitable distribution. If a parent leaves you a sum of money or a piece of real estate, that asset belongs to you alone, not the marital partnership.

Protecting Inheritance Rights

While the law provides a shield for inheritances, you must maintain that shield actively. The burden of proof typically falls on the spouse claiming the asset is separate. To protect your inheritance rights, you must demonstrate that the asset was received as an inheritance and has been kept distinct from marital funds.

If you receive an inheritance during your marriage, the safest course of action is to deposit the funds into an account solely in your name — one that never receives deposits from your paycheck or other marital sources. If you inherit real estate, ensure the deed remains in your name only.

Risks of Commingling Funds

The most common way people lose the separate protections for their inheritance is through “commingling.” Commingling occurs when separate property is mixed with marital property to the point where it loses its distinct identity.

According to the New York Court of Appeals in Fields v. Fields (2010), once separate funds are deposited into a joint bank account or used toward the purchase of a marital asset, the presumption shifts. The court generally assumes that by commingling the funds, you intended to make a gift to the marriage.

Examples of Commingling Risks:

• Joint Accounts: You deposit a $50,000 inheritance check into the joint checking account you share with your spouse to pay household bills. Those funds have likely transmuted into marital property.
• Real Estate: You use inherited money as a down payment on a home titled in both names. While you might receive a credit for the original contribution, any appreciation in the home’s value may be subject to division.
• Home Improvements: You use inherited funds to renovate the marital residence. If those renovations increase the property value, that increase is often considered marital property.

Updating Estate Documents

Divorce changes your legal relationship with your ex-spouse, but it does not automatically rewrite your entire estate plan. While New York law provides some safety nets, relying on them is risky.

Under New York Estates, Powers and Trusts Law § 5-1.4, a final judgment of divorce generally revokes any revocable disposition of property to a former spouse in a will. Essentially, the law treats the ex-spouse as if they had predeceased you.

However, this statute only applies after the divorce is final. If you pass away while the divorce is pending, your estranged spouse could still inherit everything under your existing will. Therefore, it is critical to update your will and other estate documents, such as powers of attorney and health care proxies, as soon as the marital relationship breaks down.

Updating Beneficiaries

While New York law attempts to revoke rights for ex-spouses in wills, beneficiary designations on financial accounts operate differently and are a frequent source of litigation.

Life Insurance and Retirement Accounts

Many assets, such as 401(k)s, IRAs, and life insurance policies, pass directly to a named beneficiary outside of probate. If you fail to remove your ex-spouse as the beneficiary, they may still receive the money, regardless of what your will says or what state law dictates.

This is particularly true for plans governed by federal law. The U.S. Supreme Court ruled in Egelhoff v. Egelhoff (2001) that ERISA (the federal law governing most employer-sponsored retirement plans) preempts state laws that automatically revoke beneficiary designations upon divorce. 

This means if your ex-spouse is listed as the beneficiary on your work 401(k), the plan administrator is legally obligated to pay them, even if you have been divorced for years.

Payable-on-Death (POD) Accounts

Similarly, bank accounts with “Payable-on-Death” (POD) or “Transfer-on-Death” (TOD) designations should be updated immediately. While New York’s revocation statute attempts to cover these, relying on statutory interpretation is far riskier than simply filling out a new beneficiary form.

Seeking Legal Advice

Navigating the intersection of divorce and estate law is complex. A misstep in how you handle inherited funds or a delay in updating a beneficiary form can result in significant financial loss.

At the Law Offices of Diron Rutty, LLC, we understand the nuances of how divorce affects inheritance. Whether you are looking to protect a future inheritance through a post-nuptial agreement, need to trace commingled funds during a divorce, or need to overhaul your estate plan post-split, professional guidance is essential. Contact the Law Offices of Diron Rutty, LLC today to schedule a consultation.