What is Considered Separate Property?
Don’t put your separate property in the joint or community property pot. The law assumes everything you acquire during marriage before separation is marital or community property unless it is a gift or inheritance to only one of you. If you use separate funds from before marriage to buy something during marriage, and you keep it separate, this is merely a change in the form of your separate property. The result is similar in all states, the great majority or which apply marital property and equitable division principles, while several apply community property principles.
If you have separate property, keep it that way. Put the money your grandmother left you directly into an account in your name alone. Don’t even manage the investment, such as playing the stock market. The fruits of your efforts and skills, not just your salary, are community property. Put it in a long-term investment, or a money-market account, and let it accumulate for your benefit alone. You have the burden of proving that property belongs only to you, and you want all the evidence you can get.
When you buy something with your separate property, take it, and keep it, in your name alone. The worst that can then happen is a community claim for reimbursement if your separate property is improved, or the mortgage paid, with community funds. You won’t lose your property, you’ll simply pay back half of what was taken from the community. Reimbursement merely avoids a harsh result to the spouse damaged. You’ll have your original separate property investment, plus appreciation on the separate property and one-half of the community property share of the appreciation. Your spouse will get one-half the community property share.
For example, your inheritance is used to buy a vacation home. Take the property in your name alone; it is your separate property. If you later put an addition on the home using community funds, the amount the addition increases the value is community property. If it doubles in value over the years before the divorce, then twice the original purchase price is the amount of your separate property. Twice the value of the addition is divided between the two of you as your community property. If you want to keep it, you’ll have to give your spouse community property equal in value to the community interest.
People are seldom so tidy in their financial dealings. Ned was persuaded to transfer everything into a marital trust "to save taxes." His home had been his separate property for years before the marriage; it went into a trust in both his and Wendy’s name. Wendy filed a divorce action several years later. All of the substantial appreciation on the entire home since the transfer belongs to the community. What happens to Ned’s equity at the time of the transfer?
Ned’s only hope is for reimbursement. Years have passed since the transfer and there is no chance to void it. It helps to think of property rights as entries on a balance sheet to if you want to understand discussions by lawyers and judges about "reimbursing the wife" or "reimbursing the marital community." Here, the sum of the entry for Ned’s reimbursement and the entry for Ned and Wendy’s community property is the total present value of the property.
The fair market value of Ned’s home was calculated both now and at the time of the transfer by an expert real estate appraiser. Credit was given to Ned in the amount of the value of his home at the time of transfer. The community, Ned and Wendy, received the balance, that is, the amount of the increase since then. Ned was lucky to get reimbursement: Wendy had a convincing argument that Ned had made a gift because Ned signed a document giving Wendy an equal interest in the home.
Reimbursement in this case avoided a harsh but more probable result. If the court ruled the transfer was a gift, Ned would lose his entire separate interest in the house he had owned and paid for over the years. Note that reimbursement does not affect ownership; the house belonged to Ned before the transfer, and to both Ned and Wendy after the transfer.
Be careful with the form of title, that piece of paper that sets forth the names of the owners for every piece of real and personal property with a certificate of ownership. A common form of title for real property is John and Jane Blissful, husband and wife, as Joint Tenants. Taking title in this way creates equal undivided interests with the right of survivorship. If one of you dies, the survivor automatically owns the entire property. If something is community property, put it in both names using the form of title you want. The same property held as tenants in common has only one, but very important, difference: if one of you dies, that one-half of the property goes to whoever the who has died named in their will, rather than to the surviving joint tenant.
Don’t forget accounts the children may have. Keep them in the children’s names, and the court will treat them as their separate property. The accounts are no longer your separate or community property because of the gift you both made to your children.