Money inherited from a family member or loved one can provide both relief and opportunity. For many, it becomes a chance to invest wisely, strengthen retirement funds, or build long-term financial stability.

Yet, in states with community-property laws, the question of ownership often comes up—especially when it comes to protecting inherited money from being divided in the event of a divorce.

Understanding how inheritance is classified, and how to handle it, makes all the difference in safeguarding every dollar.

Community Property vs. Separate Property

Freepik | shurkin_son| Keeping inherited money separate helps protect it from becoming marital property.

In the United States, some states follow community-property rules, meaning most assets acquired during a marriage belong equally to both spouses. However, inheritance and gifts are generally considered separate property. That means money passed down through a will or trust typically remains with the individual who received it—provided it’s handled correctly.

The challenge arises when inherited funds are mixed with marital assets. This process, known as commingling, can turn what should have been separate money into community property. Once that happens, separating the two becomes complicated.

Keeping Inheritance Separate

The safest way to preserve inherited money is to avoid blending it with joint accounts. Here are a few protective steps:

1. Place the inheritance into a brokerage or savings account under the recipient’s name only.
2. Refrain from using inherited funds to make payments on shared assets, such as mortgages or joint debts.
3. Keep detailed records of how the money is invested or spent.

By maintaining a clear separation, ownership remains more easily defined if disputes ever arise.

Retirement Accounts and Inheritance

Retirement accounts bring additional complexity. In community-property states, an IRA is often treated as shared property if contributions are made during the marriage. On the other hand, 401(k) accounts contributed to before marriage are typically separate, but any growth that occurs during the marriage may be considered community property.

For example:

If an account started with $20,000 before marriage and grew to $70,000, the $50,000 increase is generally treated as community property.

Because of these distinctions, placing inherited money into retirement accounts can blur the lines of ownership. Keeping inheritance in an individual investment account is usually the safer option.

Smart Investment Choices

Freepik | To reduce risk, diversify your inheritance across different types of investments.

Once inheritance is placed in a separate account, deciding where to invest becomes the next step. Diversification is often recommended—spreading investments across different asset classes to reduce risk. Options may include:

1. Exchange-traded funds (ETFs) that track the stock market
2. Mutual funds with a broad range of holdings
3. Index funds such as the S&P 500 or total market funds

Maintaining balance between growth and stability ensures that the money not only stays protected but also works toward future financial goals.

Legal Considerations

Rules around inheritance and marital property are governed by both state laws and federal regulations. For retirement plans, the Employee Retirement Income Security Act (ERISA) requires spousal consent for certain beneficiary changes. In some cases, a spouse may automatically be entitled to benefits unless a legal waiver is signed.

These details highlight why keeping inheritance separate is not just a personal choice, but also a legal safeguard. Professional advice from an attorney or financial planner can provide tailored guidance, especially in states with strict community-property laws.

Protecting Money for the Future

Inherited money offers a unique opportunity to strengthen financial security, but its protection depends on careful planning. Keeping inheritance separate from marital funds, avoiding commingling, and understanding how retirement accounts are treated under the law are key steps.

Thoughtful investment choices and clear legal strategies ensure that the money remains intact, providing peace of mind and stability for the future.