In recent years, I have seen more couples enter marriage with “separate property”—or assets acquired individually, by gift or by inheritance before their legal union. Separate property can include a home or business but also savings accounts and other earned or inherited funds. If you live in a “community property state” such as California, it is critical that separate property assets be titled and handled correctly or you risk losing rightful ownership should a divorce occur.
What is a community property state?
A community property state presumes that if the title or intent of an asset is not clearly documented, then it is considered marital property to be divided 50/50 in the instance of divorce. In the United States, nine states abide by community property law (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), and another five states allow couples to opt in through a special agreement.
Here are four ways to protect the separate property you bring into marriage.
1. Establish a clear title.
The property, account or other asset should have a title that includes the individual’s name to which the asset belongs. Do not add your spouse’s name to deeds, vehicle titles or financial accounts that you intend to keep separate. This avoids confusion about which spouse brought the asset into the marriage and does not imply intent to share the asset through joint ownership.
2. Maintain records of origin.
Keep clear documentation on where the asset came from and the date on which it was acquired or inherited by the applicable spouse. Origin records could include purchase contracts, closing statements or receipts, as well as deeds, titles or account-opening statements. It’s important that your name be listed as the original owner to show the asset was purchased with individual funds and that dates are included to avoid disputes over whether the asset was obtained before or after you said "I do."
3. Avoid commingling with marital property.
Once your separate property becomes part of a shared marital estate, it could inadvertently be reclassified as community property during divorce. This is particularly true of premarital funds that get deposited into a joint account, as it can be difficult to accurately trace funds’ origins once commingled. If the separate property asset changes forms—such as by using an inheritance to purchase a house—there is additional complexity to prove its rightful owner, and the asset could lose protection after it has been commingled with marital property.
4. Prepare a prenuptial or postnuptial agreement.
Many couples with separate property opt for a prenuptial agreement to ensure fair division of assets in case of divorce. This legal document clearly identifies the asset’s rightful owner and origin before it is signed by both spouses. It leaves no ambiguity about who the asset belongs to pre- or post-marriage. If you have already gotten married, it is possible to make a postnuptial agreement, but these are often more complicated to negotiate.
Clearly titling the asset is not sufficient in many jurisdictions. Courts look at when and how the asset was acquired and whether marital funds were used in the purchase to determine rightful ownership. In community property states, the burden rests with the spouse bringing separate property into a marriage to prove the assets are not shared.
Be sure to follow all four of these steps to protect rightful ownership, secure your financial interests and avoid costly disputes.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. This material was created by Thielen & Associates, Inc. for use by Forbes and does not represent the views and opinions of Avantax Wealth Management or its subsidiaries. Please view all applicable disclosures here.
