In the beginning, there was the word, and that word was Separate Property. Technically, that’s two words, but who’s counting anyway. To those readers who as kids sharpened their crayons so they would never color outside the lines—this article is for you! Unfortunately, that group also stopped reading after the whole word/words debacle in the first sentence, so we probably should have thought through the opening a bit more. Nevertheless, despite the distinct possibility of having already lost our target audience, we will press forward to our topic: protecting and maintaining your separate property.
In order to protect something, you should probably have an idea of what that something is first. Let’s start by defining Separate Property, which we will refer to as “SP” for the remainder of this article. SP includes the following: (1) property owned before marriage; and (2) property acquired during marriage by gift or inheritance.
Unlike community property, the SP of a spouse cannot be divided by a court, and it is instead awarded to a spouse independent of the division if that spouse can prove the property is SP by clear and convincing evidence. Because the law presumes all property owned by spouses to be community property, meeting the burden of proof to confirm your SP can quickly become an expensive undertaking. Here are a few quick tips to remember that will hopefully help you avoid some of the more expensive mistakes we commonly see married parties make in the management of their SP funds.
- Avoid Commingling
If hypothetical husband David deposits $100,000 he received as an inheritance from his mother’s estate into a joint account he holds with hypothetical wife Deborah that already has $100,000 of community property, David’s SP inheritance has now been commingled with community property funds in a joint account. To establish his clear and convincing burden, David must trace the funds through this account from the time he deposited his inheritance through the date of divorce. Not only does this typically require a forensic financial expert, if the SP deposit was made in 2007 and the divorce is filed in 2019, David is going to have a difficult time tracking down statements going back twelve years.
- Interest-Sweeping Accounts
David should have set up a separate account and deposited his $100,000 inheritance there. But even then, David risks unintentionally commingling because the funds will likely bear interest. That interest is considered income, and income from SP is considered community property. Segregating your SP funds into a separate account is a good start, but depositing the funds into an interest-sweeping account will further ensure that David does not commingle his SP.
- Dueling Dividends
If David had instead taken his $100,00 over to “Mike the Money Manager” and used it to buy stocks or bonds, David still risks unintentionally commingling his SP funds as a number of stocks, bonds, and funds issue dividends to stockholders. These dividends are commonly used to reinvest and purchase additional stock; however, cash dividends, like interest, are considered community property. As such, over the years, David might have unintentionally commingled what he thought was a separate brokerage account, and he would need to trace those individual stocks and bonds in order for a court to find it to be his SP.
Unlike David, who lost all of his money in a failed goat yoga business and came into the marriage with nothing, Deborah had a number of assets prior to being married. Deborah wisely obtained a premarital agreement before the wedding, which provides substantial protection to her SP. A prenup can be an effective tool for securing and protecting SP. For example, it can provide that income from SP will remain SP, so Deborah will not need to bother herself with interest-sweeping accounts or cash dividends. Additionally, when neither spouse brings assets into the marriage, but one spouse receives an inheritance, a post-marital property agreement can be prepared that will do essentially what the premarital agreement does for someone coming into the marriage with a considerable amount of SP.
- Talk to a Family Lawyer
There are far too many twists and turns on the road to protecting SP. Whether you owned a home prior to marriage that is being sold, or you inherited a fortune from your Uncle Charlie during your marriage, you should contact a family lawyer for advice on how to effectively manage and protect your SP. More often than not, mistakes are made throughout the course of a marriage that make confirmation of your SP more challenging and expensive. A small investment of time and resources early on can save you a lot of headache and hassle (and money) down the road.
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