The United States is in the midst of one of the greatest wealth transfers in history with Baby Boomers leaving their hard-earned assets to their children. While that can set many Californians up for a life of financial stability and success, it can also generate concerns when those who receive those inheritances later find themselves facing divorce.
If you’re in that position now, then you’re probably concerned about how California’s community property laws may impact the distribution of marital assets and whether your inheritance falls into the marital estate. It’s a valid concern and an issue that you need to take seriously. Let’s take a deeper dive into the matter and look at what you can do to protect your inheritance.
When does an inheritance become community property?
Generally speaking, an inheritance is deemed part of the marital estate when it’s commingled with marital assets. Depositing inherited funds into a jointly held account, then, will likely render that money community in nature, meaning that your spouse will have access to it during your marriage and will be entitled to an equal share of it during divorce.
But there may be other scenarios where an inheritance becomes marital property. For example, if you use your inherited wealth to pay down a jointly held debt, then there’s a good chance that the property and your inheritance will be deemed community in nature. Similarly, if you inherit property that is improved through marital effort, such as if your spouse helps you renovate an inherited business or house, then it may be transformed into a marital asset.
You have to be proactive if you want to shield your inheritance from divorce’s property division process. Here are some steps you can take to do so:
- Put your inheritance in a separate account: By placing inherited funds into a separate account in your name only, you create a clear record that the money is held by you alone and has not been touched by your spouse. This puts you in a better position to argue that the property has been individually owned since you acquired it.
- Avoid using inherited assets for marital purposes: It might be tempting to use your inheritance to buy things that both you and your spouse can enjoy, but this risks transforming those assets into community property. Therefore, you’ll want to be extremely careful with how you spend your inheritance and be sure to document how you do so. That way you can clearly articulate why you think it remains separately owned property.
- Avoid marital improvements to your inherited property: It’s easy to let your spouse assist you with improvements to something that you inherit, but you should avoid allowing their participation since their efforts can be seen as a contribution that transforms the inherited property into community property.
- Sign a prenuptial or postnuptial agreement: These documents can specify how property will be divided in the event of divorce. Therefore, you can clearly articulate that your inheritance will remain with you and will not be subjected to property division.
- Utilize a trust: By doing so, you transfer ownership of inherited funds over to the trust. This removes them from any contention that they’re co-owned by you and your spouse, thus shielding them from property division.
We know this can be a highly nuanced area of the law that can create a lot of stress and concern. Hopefully, though, you can develop a strategy that protects your interests so that if you find yourself in divorce you can come through the process with your interests well protected.
