Separate Property Basics

by - January 30, 2011

separate-property

Separate Property Defined
Separate property exists in both community property and equitable division states and may include any of the following:

  1. Property acquired or owned before marriage
  2. Property acquired during marriage using separate property funds
  3. Property acquired after the official end of the marriage
  4. Inheritance, gifts and bequests made during marriage by third persons for the exclusive benefit of one spouse
  5. The rents, profits, income, sales proceeds, dividends or interest generated by an asset acquired before marriage
  6. Personal injury awards or settlements (in most states)

Businesses that are owned by one spouse before marriage and continue to be owned by one or more spouses during marriage, pose unique questions in divorce, dissolution and legal separation. The characterization of a business as community or separate property depends upon whether the owner spouse devoted his or her time and expertise to the business during marriage. If the spouse was a hands-off owner who allowed the business to run without any investments of community property funds or energy, the business may be treated as the owner spouse’s separate property. If on the other hand the owner spouse devoted his or her time and expertise to the business during marriage, the community may be entitled to a reimbursement and/or any appreciation in the value of the business attributable to the spouse’s time spent in the business during marriage.

Separate property assets generally are not divided in divorce, however may nonetheless be distributed to your spouse if special circumstances exist or a judge or commissioner decides it would be fair and equitable. Factors that might warrant the division of separate property include, but are not limited to:

  • A spouse’s inability to work due to his or her age, health or disability
  • Marital liabilities exceed assets
  • There are no marital assets and one spouse has a large separate property estate while the other does not
  • There are no marital assets and one spouse has valuable separate property assets while the other does not, and the poorer spouse was a stay at home parent who is not earning an income and would be unable to support him or herself after divorce, dissolution or legal separation
  • A spouse received a community property asset during asset that must be returned to the community

Examples of circumstances that may justify the distribution of separate property in divorce, dissolution or legal separation:
(1) Wife received a community funded education during marriage and husband did not, less than ten years have passed since wife completed her education, and the community has not already benefited in some way from wife’s education.
(2) Husband misappropriated community property funds during marriage (i.e. buying a car for his girlfriend during marriage).
(3) Husband’s separate property sole proprietor business was sued for injuries suffered by an employee and he was ordered to pay the employee damages.

Commingling Separate Property
Husbands and wives commonly commingle their separate and community property assets during marriage. They do this by depositing both community and separate property funds into a single joint account and/or by making purchases, transferring money, reinvesting and even borrowing funds from third party sources. The mere mixing of separate and community assets does not change the respective characteristics of the assets, provided a spouse can trace the separate property portion of a mixed asset to its separate property source. If a spouse is unable to trace and identify his or her separate property contributions, the entire asset that was acquired or once included separate property will be treated as divisible community property.

Transmuting Separate Property
A transmutation in divorce, dissolution and legal separation is an interspousal transfer (between spouses) or an agreement that changes the character of property the husband and wife already own. There are three general transmutations that may occur in marriage: (1) the transmutation of community property into the separate property of one spouse; (2) the transmutation of one spouse’s separate property into community property; and (3) the transmutation of one spouse’s separate property into the separate property of the other spouse. In some states like California, the transmutation of very valuable assets are invalid unless they are set forth in a written agreement that includes an express declaration by the spouse whose interest is being effected that he or she intentionally made, consented to, or accepted the change in characterization of the asset. (Transmutations in California that occurred prior to January 1, 1985 are governed by the law that was otherwise applicable.) When state law requires transmutation agreements, strict compliance is usually required before a judge or commissioner will confirm and validate the transmutation.

The law of transmutation generally does not apply to commingled assets or assets of minimal value, such as gifts of jewelry, clothing or other gifts that are intended for and used solely by one spouse (e.g. your husband’s fishing rod or your women’s snow shoes). Transmutations are also usually subject to fraudulent transfer laws, which means that courts will scrutinize the facts and circumstances leading to the transmutation to ensure it was not the result of fraudulent activity.

This article is not legal or financial advice. You should contact a lawyer, accountant and/or financial professional in your state to discuss the specifics or your case and applicable laws.

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