During the divorce process, parties are tasked with determining how to equitably divide their marital property. Typically, “marital property” is defined as any property acquired between the date of marriage through the date of separation, however, there are a few exceptions to that rule. One exception that frequently arises in divorce is where one party has received a gift or inheritance.

Under Pennsylvania law, gifts and inheritance to one spouse are usually considered to be non-marital property. Only the increase in value to a gift or inheritance received from a third party during the marriage is subject to equitable distribution as marital property.

Diminishing Credit Theory

A scenario that frequently arises is where one spouse has taken an asset that would typically be considered non-marital property – such as an inheritance – and in some way combines or comingles it with marital property. Common examples are where someone receives an inheritance and then uses it to purchase a house in both parties’ names or deposits it into a joint account. This commingling of marital and non-marital property would cause the gift or inheritance to become marital. While it is not specifically the law under the divorce code, some counties in Pennsylvania will consider a vanishing or diminishing credit doctrine.

The “vanishing or diminishing credit doctrine” is a means of calculating or evaluating the amount of credit for a contribution of separate property to the marital estate, such as a gift or inheritance. The doctrine focuses on the length that the contributed property was held jointly, not the overall length of the marriage. Typically a non-marital contribution will become marital at a rate of 5% per year.

For example, if you used a $20,000 inheritance to purchase a house in both spouses’ names, if the property is held jointly for 10 years, then 50% of the $20,000 in typically considered marital property. The remaining $10,000 may be distributed directly to the contributing spouse off the top of the estate as non-marital property. If the contributed property is held jointly for 20 years no credit may be given.

How can I keep things separate?

The simplest option is to keep any gift or inheritance in an account in your name alone and not contribute it towards marital assets or expenses. The best thing you can do to protect your separate property is to sign either a prenuptial or postnuptial agreement outlining both parties’ rights in relation to the gift or inheritance. These agreements can even allow you to contribute the gift or inheritance towards a joint expense such as a house, while still being entitled to receive the entire gift back during a divorce. 

What about a gift from my spouse?

Did your spouse buy you a diamond necklace? A car? Under Pennsylvania law, a gift between spouses is always treated as marital property and subject to equitable distribution. This does not include an engagement ring which is considered a gift in contemplation of marriage and is therefore non-marital.