Will you keep your inheritance if you get divorced in California?

by - April 27, 2014

California is a community property state but this doesn’t mean, as some believe, that separate property ceases to exist or magically transforms into community property upon marriage.

In fact, both Family Code Section 752 and Section 21 of the California State Constitution guarantee and protect separate property. Section 21 of our Constitution provides,

“Property owned before marriage or acquired during marriage by gift, will, or inheritance is separate property.”

So if you received an inheritance before or during marriage or even during your California divorce, is it yours to keep?

It depends.

Under California family law separate property includes any of the following:

  1. Property acquired before marriage and after separation
  2. The rents, profits, income, sales proceeds, dividends or interest generated by a separate property asset
  3. Inheritance, gifts and bequests made during marriage by third persons for the exclusive benefit of one spouse

If you are the only named heir, the inheritance is your separate property. But you may not get to “keep” it.

If any of the following occur, your separate property inheritance could be lost to you.

  1. You transmute (transform) your separate property into community property or your spouse’s separate property
  2. You commingle the inheritance, such that the funds cannot be traced to the original source
  3. You hide or fail to disclose the inheritance to your spouse during divorce and you are found out
  4. For some other reason you are sanctioned and your inheritance is the only available source of funds to pay the sanctions
  5. The family court includes your inheritance as an asset for purposes of calculating spousal support, which could ultimately result in using your inheritance to pay the support for lack of other income or assets (i.e. your primary source of income is your inheritance and the funds are used to pay the ordered support)
  6. The court makes an equitable ruling that leads to using your inheritance in or as a result of, your divorce

How can you determine whether an asset or debt is separate property?

Most divorce attorneys use this analysis to determine whether an asset or debt is the separate property.

  1. Determine whether a prenuptial or postnuptial agreement was signed
  2. Identify the dates of marriage and separation
  3. Determine whether the asset or debt was acquired before marriage or after separation
  4. If the asset/debt was acquired before marriage, determine if the assets/debts were transmuted or commingled
  5. If the asset was acquired during marriage, determine if it was a gift, bequest or inheritance or generated by a separate property source
  6. Gather evidence that directly traces the separate property to the separate property source

When and how are separate property assets commingled?

Husbands and wives commonly combine their separate and community property assets during marriage. They do this by depositing both community and separate property funds into joint accounts and/or by making purchases, transferring money, reinvesting and even borrowing funds from third party sources.

The mere mixing of separate and community property does not change the character of the property. Commingling only occurs when separate and community property cannot be traced to the original source.

If a spouse is unable to trace his or her separate property contributions to an asset, he/she may not be reimbursed for the separate property funds invested unless the tracing requirement is waived. Men and women negotiating divorce settlements without the court’s assistance may waive tracings and disregard commingling if they agree to do so.

If a spouse can trace the separate property portion of a mixed asset to its separate property source, usually done with bank statements, probate documents and escrow records, the separate property may be reimbursed. Separate property is only reimbursed if it was used to purchase or pay for particular things. For example, separate property used as a down payment for a community property home or to make improvements that increased the value of the community property home, may be reimbursed. Separate property used to pay for things like property taxes or vacations generally are not reimbursable. California’s Family Code Section 2640 governs reimbursement.

How is separate property transmuted and what does that mean? 

A transmutation is an interspousal transfer (a transfer between spouses) or an agreement that changes the character of the separate property. During marriage, property may be transmuted from community property into the separate property of one spouse, from a spouse’s separate property into community property, and/or from the separate property of one spouse to the separate property of the other spouse.

In order for a California family court to rule that a very valuable asset was transmuted, the transmutation must be memorialized 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 applicable at the time of the transfer.) Assets of minimal value, such as gifts of jewelry or clothing may be transmuted without an express writing.

Transmutations are subject to fraudulent transfer laws, which means that if property is transmuted, the courts will 66scrutinize the facts and circumstances leading to the transmutation to ensure the asset was not transferred as a result of fraudulent activity and the burden of proof is on the benefiting spouse. In case you are wondering, separate property real estate may be transmuted by a deed.

In California it is common for Interspousal Transfer Deeds to include the express declaration required to transmute the property. However, unless the deed or another document expressly states that the separate property downpayment used to purchase the property and the 2640 right of reimbursement is being waived, the separate property downpayment for the house that was transmuted, is not transmuted with the property. If you are wondering if your right to reimbursement exists if you purchased and sold several houses during marriage, the answer is, provided the separate property funds were not transmuted and can be traced to the original separate property source, the right to reimbursement remains.

How is separate property divided in divorce?

Generally speaking, separate property is not divided in divorce. Instead it is awarded to the spouse who received/acquired/owns the separate property. There are occasions in California divorces when separate property may be used to resolve unique divorce issues, but this is rare. Separate property is/may be considered for purposes of determining whether and the amount of child and/or spousal support that may be awarded.

How can separate property be preserved during marriage?

The easiest way to preserve a separate property asset during marriage is to avoid commingling, using and/or transmuting the asset. Separate property is easily preserved by depositing the funds into a separate account held only in the separate property owner’s name, keeping all of the records for the account and refraining from using the account in any way. This isn’t required and may not be possible for separate property like real estate or yachts, but as a general rule of thumb, separate property assets are preserved if ownership is not transferred to a spouse, commingled with community assets or used to pay expenses that will not be reimbursed in the event of divorce.

Can the community acquire an interest in a separate property asset during marriage?

Yes, the community can acquire an interest in a separate property asset if community property funds are contributed to the equity of the separate property asset. This often happens when a spouse uses his/her earnings during marriage (community property unless generated from a separate property asset without any labor of the spouse or an agreement provides otherwise) to pay the mortgage or make improvements on the separate property house. The interest the community acquires is described as a Moore-Marsden apportionment. A specific formula is used to determine the community property and separate property interests in the asset.

If you and your spouse participate in divorce mediation and negotiate a settlement, you do not need to determine whether or not assets are community or separate. If a Judge resolves your property issues in divorce, he/she must award separate property to the spouse who proves that it is his/her property and overcomes any presumptions (i.e. undue influence).

If you would like to determine whether an asset is separate property or how to do a tracing in a California divorce, legal separation or dissolution of a domestic partnership, click here to schedule a consultation and case assessment with me.

This article is not legal and is not intended to be an exhaustive discussion of the laws and principles discussed.  Please speak with me or a lawyer, accountant and/or financial professional in your state to discuss the specifics of your case and applicable laws.