EP 210: How to Keep Separate Property Separate (and Know if Separate property is Actually Marital)
Visit us at divorceandyourmoney.com for the #1 divorce resources in the USA and get personalized help. Learn about coaching services here.
One of the challenges in divorce is making sure that separate property stays separate. And it could be the case that you’re trying to prove what’s being claimed as separate property is actually marital property. Now it’s a bit of an advanced topic, but an important one, and just a reminder, and I said this in the previous episode, if something is marital property, it means you have to split the value of it between you and your spouse during divorce. And if it’s separate property, then the person whose separate property it belongs to gets to keep it and you don’t really discuss it at all as far as the divorce goes.
One of the most common types of separate property is an inheritance where the parents of one spouse gives them a bunch of money. He may be married or not married at the time and that inheritance is a common type of separate property that exists. Another time it could be a retirement account or a house bought before the marriage.
Now if you didn’t listen to the previous episode on tracing and how to trace separate and marital property, that is important context for this episode. But also I want to give you some different tips and how to keep separate property separate and how to maybe prove that that separate property is actually marital property and ways to do that cleanly and things that you can think about. Because also one of the important points when it comes to separate and marital property is sometimes not all of the property is separate. So sometimes a piece of property, let’s just say it’s worth 100 bucks, could be an inheritance, could be a retirement account or something else and say it’s $100 today. Well it could be the case that 10 of those $100 are actually marital property or 50 of those $100 are marital property or all of that hundred is marital property.
It’s not always an all or nothing thing and so there are some gray areas and I want to show you how to avoid the gray areas depending upon who you are or actually to ensure that there are some gray areas so you can get your appropriate share. Now the other thing I always have to say, particularly with this type of an episode, is state laws vary a lot in terms of the languages they use and how they discuss whether something is separate or marital property. So make sure you ask your attorney some of the mechanics of the particular asset that you’re discussing when it comes to this. But I’m going to give you three tips in this episode on how to keep separate property separate. And that’s what I’m going to focus on. One is to avoid co-mingling. Two is to keep track of income and dividends and three is a prenup or postnup.
So let’s get into these. Let’s start with point number one which is avoid co-mingling. It’s a term you’ve probably heard before and it just means keep something that’s separate property, always in a separate account with only your name on it. And so if you get an inheritance, let’s just say a $100 inheritance, because we can all do math on $100. Let’s say you get an inheritance of $100 and you got it a decade ago. Make sure that that inheritance only went to a bank account and stays in a bank account in your name only. And then the other element to that is don’t ever move those funds to a joint account because once you move those funds to a joint account and they get mixed up with a bunch of joint assets, it makes it very, very complicated, expensive and challenging to go back in time and try and figure out how much of that asset is marital property and how much of that asset is separate property.
The second point to think about is that you need to keep track of income and dividends, so it’s not just enough to keep money in a separate account to keep that property separate. Sometimes, depending upon your state laws, the income from that account or the dividends that come in from the account or other things related to that could become marital property and they don’t stay separate.
So if you get, let’s just say you have an account with $100 in it and every year you get one extra dollar in income on that account. So after 10 years you’ve got $10 of income. Well, you need to keep track of that income every year and maybe even deposit that income into a separate bank account. It can still keep your name and your name only on it, but when you keep track of it in a separate account, it makes it easier to figure out, “Hey, that portion of the account may ultimately be marital property, therefore let’s keep it.” And that way it’s easy to track it and you don’t have to go get a bunch of forensic experts to say, “Oh yeah, here’s where all the income came in.”
Some of the terminology used for this is an income sweep account, if you go to a bank or something like that, and that means that the income is swept into the various portions of your account. The way to do that, or so if you’re on the other side of that issue, even if an account is mostly separate, you need to go back and ask your spouse or get the records to see if any income came in from that account because that income may be marital property for you to discuss and split up.
And so that’s where one of the levels of complication comes in. But to the extent you can avoid it, if you’re the person who owns that account, you want to keep it clear if any income came in or dividends came in and make sure that that is separate. It just depends on the state laws whether or not that income is considered separate or marital. And so you need to ask your attorney how it applies in your state and your situation. But that’s something to think about.
The third thing to think of, if you are able to have some foresight and that is to get a prenup or a postnup. Now, if you’re listening to this podcast, you probably are not thinking about a prenup, but you might have one that exists, in which case it would be important to think about what’s in that prenup. But also you might be able to investigate a postnup or postnuptial agreement, in which case you can designate certain assets as separate in the event that you get divorced. And one of the places I actually see a lot of postnuptial agreements and a lot of prenuptial agreements is second marriages, and even a postnup.
If you’re getting married after 40 or 50 it’s very possible to go back and get a postnup and get that. And if you agreed to a postnup, you can designate a particular inheritance or designate a business or a home or retirement account or whatever the asset is as separate property in the event that you were to get divorced. So that’s something else to consider.
And if you’re on good terms with the spouse and maybe a divorce isn’t for another several years, you could perhaps, depending upon the situation, have that discussion about a postnuptial agreement and go from there in terms of protecting yourself and protecting a particular asset as it goes on, as time goes on, and keeping that separate property separate.
Now one last warning, one last topic and that is is even if you do everything perfectly, it can still get brought up in a divorce and it can still be a fight and a discussion that comes up as part of the divorce process or at a minimum, the opposing, your spouse’s attorney can ask for records related to a certain asset even if you did everything properly. So one of the things I talk with you about all the time on coaching calls is, “You kept it separate, it was clear it’s separate, but your spouse’s attorney is getting a bunch of records on the particular asset,” or it could be a house, could be inheritance, whatever, and you get worried. Well, if you did everything right, there’s nothing to worry about.
Now if you’re on the other side and you didn’t do everything right, there are certainly some things to think about and things to prepare for. But, and there might be some more expense involved, but if you did everything right, so be it. The way that I look at this on a different way is even if you do everything right and you did everything right and your spouse’s attorney is asking for records on things, it’s their job to.
And so your job is to make sure you have all the records and have everything cleanly set up so that there’s no question when it comes up. It’s their job to question everything and try and get more assets for their client. So even if you do things perfectly, you’re not necessarily out of the woods, but if you don’t do things perfectly, it can really complicate things down the line. And so what I want you to do with this episode is make sure you’re thinking about and you understand and you have a concept of all the issues you might be facing when it comes to separate property or marital property and how to keep things separate or how to challenge whether something is actually separate or marital property. And the three tips are avoid co-mingling the assets, keep track of income and dividends and finally to consider the prenup or postnup as it comes to getting divorced.