How To Avoid Inherited Property From Becoming A Marital Asset
The division of property may be one of the most contentious issues a divorcing couple must resolve. California designates assets acquired by a couple during their marriage or while in a registered domestic partnership as “community property” to be equally divided amongst the spouses. An inheritance received by only one spouse or partner is considered “separate property” not subject to division. How you hold, and access property received through inheritance could change and cause all or part of it to end up in an ex-spouse’s hands.
Property Division in a Community Property State
State law governs how property acquired by a couple during a marriage is divided between them when they decide to end their relationship. Property is classified as marital property, which is subject to being equitably split, which means fairly as opposed to equally, between the parties unless one of them can prove it to be separate property not subject to division.
Nine states, including California, follow a method of identifying the money, real property and other assets a couple acquires during a marriage as community property owned equally by each of the parties and to be divided equally if the parties end their relationship. Property you bring into the marriage or received through inheritance may be claimed as separate property that would not be subject to division with your spouse. But unless you take care about how you handle the inherited property, you could expose those assets and their income to division.
How Commingling Affects Inherited Property
California permits you to claim as separate property the house your aunt left to you in her Will even if the inheritance came to you during your marriage. Rent you receive from a tenant or the money you make on the sale of the house would also be treated as separate property as would anything you purchased using money derived from the inherited property. But, the key is to keep clean records and keep it separate!
Preventing inherited property from becoming community property can be a challenge without the assistance of an attorney to guide you. For example, selling the home you inherited and depositing the money into a bank account held jointly by you and your spouse results in a commingling of separate property with community property that could cause all or some of the inheritance to be subject to division during a divorce, if for no other reason but because it is not easily traced to that separate property source.
Another example of commingling would be using some or all of the money received through an inheritance to make repairs or improvements to a home you own jointly with your spouse. A court may determine that commingling occurred and the inheritance invested in the jointly owned property was now community property. Even if you could prove the money you contributed toward the improvements should remain separate property, a court may treat the increased equity due to the appreciated value of the home as being community property.
Protecting Your Interest in an Inheritance
The law specifically excludes an inheritance left to you alone and not to you and your spouse from the presumption of it being community property. Steps you might consider taking to protect your inheritance from becoming community property include the following:
- Do not commingle your inheritance or profits derived from it with assets you own together with your spouse.
- Do not add your spouse to title or take loans out in both of your names secured by that property.
- Keep and protect all records pertaining to inherited assets in order to have them available should your spouse challenge their status as separate property.
Advise your family to provide for you via an irrevocable trust with a third-party trustee. This keeps it out of your ownership all together while still providing you a beneficial interest. It would likewise not be subject to spousal support orders or other negative effects of divorce.
If you already inherited then you may want to consider placing your separate property inheritance into a separate property trust.
Obtaining Legal Advice About Inherited Property
These are just a couple of easy tips to help protect your family’s hard-earned money from going out the door in an unintended way. The attorneys at NM Law combine their knowledge of California laws with their skills in estate planning and asset preservation to advise clients concerned about protecting inheritances in the event of a divorce. Call them today at (949) 253-0000 to schedule an appointment.
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.