It depends. An inheritance is considered Separate Property in Colorado and is not subject to be divided by a court in a divorce. That means you usually can keep the original value of the inheritance. There are of course several deviations from this rule.
For instance, if you deposit the inheritance in mutual funds in your own name, and over time the mutual funds increase in value, the increase in value is “marital property” while the original deposit is “separate property.” For example, you inherit $100,000 from your grandmother and deposit the $100,000 into mutual funds in your own name. Five years later a divorce is filed. The mutual funds are now valued at $150,000. The $50,000 increase is marital property subject to be divided by the court. The original $100,000 remains your separate property and is not subject to division by the court. You will be required to prove that the original $100,000 was your separate property if disputed. Therefore, you should always maintain records of the inheritance, the location of deposit and its existence over of the years. I also recommend you do not commingle this account with marital funds which now make it difficult to trace what is separate property versus marital property in the mutual fund account. Create a new account with your marital funds and always keep your separate property, just that – separate.
A person can also convert the inheritance from separate property to marital property by acquiring a jointly titled asset with the inheritance. For example, you purchase a piece of real estate using the $100,000 inheritance from your grandmother as a down-payment for the purchase and title the real estate in joint names. This is presumed a gift to the marriage and unless you can overcome the presumption of a gift, your inheritance is now a Marital Asset. The court has jurisdiction to divide “marital assets.” While a court has the ability to consider the contribution to the acquisition of the real property, there is no guarantee the court will give you a greater percentage of the property due to your inheritance contribution. That is in the court’s discretion.
There are other examples of issues relating to separate property versus marital property, gifts to the marriage and the tracing of subsequently purchased property with inheritance money, that has been subject to a number of appeals.
These questions can be technical and unfortunately most people do not seek legal advice on how to protect the inheritance upon divorce when the inheritance is received. The issue generally arises in the divorce. The attorney cannot modify the facts as to what you did with the inheritance but can assist in achieving the best result possible in light of the facts.
For these reasons, I strongly urge people to seek legal advice upon receipt of the inheritance, learn how to protect the assets and then make informed decisions on the best method to handle and invest the inheritance.