You may have an adult child who is happily married right now, but there’s always the possibility they could get divorced in the future. After all, about half of marriages in America end that way.
Now imagine this sequence of events: You pass away while your child is still married, you leave money or property to that child, and then a few years later they get divorced. What happens to the assets you left to your child?
How Does California Treat Property Inherited During Marriage?
California is a community property state. Under the community system, the way asset division works in divorce is that assets you owned prior to marriage remain yours, but assets acquired by either spouse while married are considered community property. At the time of divorce, the value of community property gets divided as evenly as possible.
Inheritances, however, are an exception to this rule. Inheritances are generally exempt from community rules. So, an inheritance received by Spouse A will not normally be split with Spouse B at the time of divorce.
Notice that we said inheritances are generally exempt from community rules, and inheritances are not normally divided in divorce. We phrased it that way because there are a couple of scenarios that do, in fact, cause an inheritance to be subject to division. One is called “commingling,” and the other is called “transmutation.”
Commingled Inheritance
What your child does with their inheritance can change it from separate property to community property. If they “mix” the inherited assets with other assets accumulated during the marriage, then it’s possible the inheritance will become so “commingled” with other property that it becomes impossible to separate and will therefore need to be divided in the case of a divorce.
For example, if you leave a sum of money to your daughter and she puts it into a separate bank account, owned only by her, then there will be no problem. But, if she puts the money into a joint account, shared with her husband, that money is now co-owned by both of them; they both have legal access to it, and if they get divorced the money in the account will get divided.
Inheritance can become commingled in other ways, too. For example, your child may use all or part of the inheritance to acquire other assets during the marriage. If your child uses an inheritance to buy a jointly owned car or house, then that portion of the inheritance is no longer separate. Instead, the purchased asset is community property and subject to division during divorce. Or, you might leave a beachfront home to your son, which becomes his separate property. If his wife invests in remodeling the home, however, the home could become commingled and become community property.
Transmuted Inheritance
You’ve probably heard of prenuptial agreements, which are essentially contracts signed before a couple marries, dictating who owns what. They’re designed to ensure that, in the event of divorce, the assets bypass state property rules and instead get divided according to the agreement.
Couples can accomplish the same goal by signing a postnuptial agreement. Sometimes these are referred to as “transmutation agreements.” Transmutation means to change from one form to another. In this context, it means to change property from one type of property to another – from separate property to community property or vice versa.
Using a postnuptial agreement or transmutation agreement, your child could cause their inheritance to become community property and be subject to division in divorce. They could specifically say that whatever items you left as an inheritance should count as community property. Your child might decide to do this for a few reasons:
- To reduce the tax burden of specific properties and assets
- To establish evidence of ownership
- To make divorce simpler
The postnuptial/transmutation agreement must be in writing to be valid.
Create an Irrevocable Trust to Reduce the Risk of Your Child Losing Assets to a Former Spouse
Perhaps the best way to keep your child’s inheritance separate from their spouse’s money is to put it in an irrevocable trust. To do this, you would:
- Transfer the inheritance (money, real property, other assets) into the trust
- Name your child as beneficiary
- Name a trustee (this is the person or company that manages the trust)
- Leave written instructions specifying how the assets can be used and when
Your choice of trustee is important. It can be a family member or a company (corporate trustee). If your goal is to avoid commingling, then the trustee should not be your child. If your child is both the trustee and beneficiary, the child could take money out of the trust and use it for marital expenses. Then, if the child gets divorced, the commingling problem arises again. Since the child used trust funds for marital purposes, the court could consider the trust to be community property and divide it during divorce.
Plan for the Possible Divorce of a Beneficiary
It may not be pleasant to imagine your child getting divorced after you pass away, but it could happen. It’s important to think about what you would want to happen to the assets you left your child. At the Law Office of Janet L. Brewer, we help clients think about such possibilities as part of our comprehensive, thoughtful estate planning process.
If you have questions about this topic or any other aspect of estate planning in California, call 650-325-8276 or contact us online to schedule a meeting with our experienced estate planning attorney. We have more than 30 years of experience helping people with trusts, wills, charitable planning, probate and all related areas of law. Our office is conveniently located in Los Altos.
