Keeping An Inheritance As Separate Property During A Marriage
The law considers inherited property to be a personal gift to the recipient and a spouse or domestic partner has no claim to it. When couples divorce, the inherited property generally stays with the person who inherited it.
But inherited property must retain its character as separate throughout the marriage. That means it must be easily identifiable as belonging to the person who inherited it or it can lose its status as separate. Separate property that has been ‘commingled’ with other marital assets will be considered partly owned by both partners when they divorce.
What is ‘Separate’ Property?
Property that is owned by each partner prior to their legal union is separate property. Gifts or inheritances received by either partner after marriage are the separate property of the recipient.
And monies earned from or property acquired with separate property retains its character as separate. So if one partner inherits an apartment complex from his dad, the rental income from the apartments belongs only to him as does anything he purchases with the rental money.
Once a couple has legally separated any income earned, property acquired or debt accumulated is separate property.
Community Property in California
California is one of a minority of states that characterizes all property acquired after marriage (that is not separate) as belonging to the community of both partners. Community property includes:
- wages earned
- contributions and growth to retirement accounts
- all assets acquired
- proceeds of personal injury settlements
- debt incurred by either partner
Community property is considered half-owned by each partner. As such, one partner cannot legally gift community property without the written consent of the other. Additionally, newer types of assets like cryptocurrencies are also considered community property if they are acquired during the course of the marriage.
Why Separate Property Can Become Community Property
Separate property may lose its character and become community property when it becomes sufficiently mixed with community property so it can no longer be distinguished as separate. Separate property can also become community property by agreement between the partners.
The following are examples of how the separately inherited property of one spouse can become commingled with community property.
- One partner inherits a house 5 years before the marriage. After the marriage, the couple decides to do a major remodel on the house and they take out a loan in both their names to complete the project.
- Shortly after marriage, one partner inherits a large sum of money from a relative. The partners use cash from the inheritance to make the down payment on a house they purchase in both their names.
- During marriage, one partner inherits an interest in a failing family business. Both partners contribute significant time and effort to the business causing the value to increase substantially.
What To Do When Separate Property Gets Commingled
It is not uncommon for married couples to mix their separate property with their community property – especially when there is no trouble in paradise. But in a divorce, people start to feel less generous and are much more likely to want to keep what they believe to be theirs. This can be tricky when separate property and community property have been commingled for a considerable period of time.
In California, when divorcing partners cannot agree on how to characterize the ownership of certain property, courts have two methods for determining what property is separate and what is community.
Direct Tracing – With direct tracing a person must provide a documented account of acquiring the separate property and how it has remained separate from community property.
For instance, one partner receives a check for $100k as part settlement of his uncle’s estate. He deposits the check in the community bank account and uses it to buy a $40k car and invest in a $60k business venture. If this is properly documented it shows that the car and the business are separate property.
Family Expense Tracing – This type of division of commingled property is used when the separate property cannot be directly traced. It assumes the property belongs to the community to the extent necessary to meet community expenses and allocates what is leftover as separate property.
Assume one partner receives monthly annuity payments from her deceased father’s retirement account. She deposits the $3k into a joint account. The community contributes $7k each month to the account. Monthly community expenses are $8k. Only $2k of each annuity payment will be considered separate property.
The presumption is that commingled property belongs to the community so both of the tracing methods require documentation to establish that the property should be separate. The better the paper trail, the more likely the property can be accurately separated.
How to Make Sure An Inheritance Remains Separate Property
The best way to make sure inherited remains separate property is to take specific steps to keep the property separate from the property that is owned by the community.
- place money or investments in a separate account
- title assets (land, cars) in only your name
- maintain detailed and complete records
- make a written agreement with your partner acknowledging the status of the property
If you are concerned about keeping inherited property as separate property it’s best to talk to an attorney who can provide specific advice about your unique situation. Property ownership can get complex when the property is commingled so it’s best to keep things separate from the beginning rather than try to separate them years down the road.
Contact an Orange County Divorce Lawyer Who Can Help
At Pedrick Law Group, we counsel clients both before and during divorce and help them to keep property they inherited as their separate property. Call Orange County divorce lawyer Gregory Pedrick at 949-313-2704 or contact us here to schedule a free consultation.