EP 228: How Do You Keep Separate Property Separate? (Or Prove Separate Property is Actually Marital Property?)
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It’s been a few months since I recorded a new episode and not because I haven’t been working, but because I’ve been working a little too much and got behind on the podcast episode. So apologies for that. Thank you to all 0f the people who I’ve been speaking to over the past several weeks and months, there’ve been lots and lots of good questions and, and coaching calls coming in. And I want to get back in helping educate you on the different intricacies of the divorce process. And this episode specifically, I want to talk about some subjects that have been coming up quite a bit.
And the first one I’d like to talk about is how do you keep your separate property separate? And also, how do you know if a separate property or what’s being called separate property is actually marital property. And if you’ve been listening to other episodes, you know what I’m talking about in the context, but the big issue is, let’s say you had some money.
When I say property, it could be something like money. It could be a physical property. It could be a retirement account, a car, whatever. Let’s say you had something before you got married. How do you make sure that if you’re now, unfortunately, facing divorce, that is still considered separate property? What kind of things can you do? Or should you be doing? And conversely, if your ex-spouse, for instance, is saying, well, this is separate property, but, but you think it’s actually something that you should be splitting between the two of you. How do you broach and go down that discussion? It’s a very common topic that comes up every, every few days in terms of people that I get to speak with. And there are a few things to consider here.
And let’s take it from the perspective of you having some separate property. Maybe you got an inheritance as a, maybe you had something when you got married, there’s a lot of different types of separate property. How do you make sure that it stays separate? A few things.
The first is to keep good records. Now keeping good records doesn’t ensure that something is separate, stay separate. However, keeping good records can ensure that you can at least be able to prove the argument one way or another in terms of what is going on. So you need to make sure that you can keep good records. Now it becomes a challenge when sometimes you’ve been married for, someone called me, I spoke to just the other day, who’d been married for 31 years and there was a separate property question and there’s no way to get the records. And so we were talking about some advanced strategies in terms of, getting affidavits from a parent who’s still around and, and other siblings who are on the receiving end of this inheritance when everyone got the same amount, et cetera, et cetera. In lieu of being able to have actual records, they had to approach a different direction.
But if you have things like bank accounts or old account’s statements, some of these institutions keep account statements for, for a decade or more, or if you walk straight into your bank, sometimes they can pull if you’ve used the same bank for a long time and they’re still around. Oftentimes they have good records that go back further than what you may build, ask or access online, or just to get when you stroll in if you just talk to a casual person at the bank. But anything you can do to get old records, old communications that indicate when you received some form of property and how much it was at the time it can bolster your case.
The second thing is to avoid co-mingling is a term that if you listen to the podcast, you should’ve heard before. But co-mingling is just the idea that you may mix your separate assets with your marital assets. Simple as that. And what does that mean? Well, let’s just say you got an inheritance and then you got an inheritance of $100 and you put 50 of it into your joint checking account. Well, now you have co-mingled that money. And then you spend that $50 on groceries. Well, is that still separate property? And the answer is it gets really tough and you’re probably dealing with marital property at that point. And there’s not much for you to do. But if you keep that a hundred dollars that you got as an inheritance in its own bank account, and you didn’t ever put your spouse’s name on it and you didn’t touch it, if for, for normal family purposes, then you will have a much better shot at keeping that account separate.
Now, of course, you always need to have your records and you need to always keep that account in your name. And if you’re adding in some tracking to that account, all of a sudden the math gets messy unless you have those records, but it is something that is doable. And the cleaner you keep that separate property, the easier it’ll be to prove that it is separate property in the context of divorce.
And conversely, I said I was taking this from the perspective of the person who has separate property. Well, if your spouse is the one who’s claiming it’s separate property and they don’t have these things that present a good case for you to say, well, hold on a second, maybe this isn’t separate property, this should probably, or may need to be considered marital property. And so for these different issues or different tips, I’m giving, if you’re the person who’s on the other side of this, these are the things that you should be thinking about, bringing up to advocate for yourself to make that separate property marital. Particularly if some of these things don’t exist.
So one is good, keep good records. Two is to avoid co-mingling. The third thing is to keep track of income and dividends from separate property. And now this is a very tricky one, and this is very state-specific. And I always say, when someone calls, I say, this is technical. And when I say this is technical, I mean, each state can be very different in how they interpret this. And so you really need to have a knowledgeable lawyer in terms of understanding what I mean by this point.
Keep your income and dividend separate. Well, let’s just say you have a bank account with $100 in it and you get 1% interest a year on that account. Well, with that 1% interest, you’re earning $1 a year. Well, that $100 that is in, in some states, the $100 is, is almost always going to be separate property. However, that $1 in interest in some states is considered marital property. So if you’re earning interest on an account, the $100 is separate, but $1 is marital. And if you think about that over time, where after a year or two, you have a little bit over $102, year three, et cetera, et cetera.
Well, if you think about those earnings over time, that can add up to become a substantial amount. I’m just using the context of a simple savings account, but some of you have retirement accounts to pay a lot of dividends and interest, and there’s a lot of appreciation in them. And you need to really have a discussion with your attorney as to, well, is it all separate or all marital, or is there some combination of the two? Because sometimes it is sometimes that separate property that you thought you did everything right. Well, that income and dividends may actually be marital property that you have to split. And now all of a sudden the picture certainly shifts for you.
So something to really think about and know the laws in your specific state on that one. And, and it gets tricky. And so what you may want to do if you’re thinking about, or if you have separate property, I should say using my example of you have $100 in separate property and you get $1 in interest a year. Well, maybe you want to put that $1 in interest always goes to a different account now that different account, might still just have your name on it, that different account you might not touch anyways. However, from an accounting perspective and trying to figure out what’s part of the marital pool later down the line, having that separate account is a good way to pursue that and to figure that out.
The fourth thing I want to discuss is to consider getting a postnuptial agreement. Now, look, postnuptial agreements are very tough. Now, sometimes you may have a prenup which deals with these things, but if you’re listening to this podcast, getting a prenup is a little too late. But if your state allows for postnuptial agreements, that may be a way to keep separate property separate. Now not every state allows for postnuptial agreements, but if your state does, and your spouse is willing to negotiate with you on it, then that is something to consider that can make the math. And at least simplify part of, this part of the divorce discussion later down the line. Now postnuptial agreements can happen in a few different circumstances that I see most commonly. It’s hard to be married for eight years. And then in year nine, you say, I want a postnup. That’s, that’s a tricky proposition. I mean, if you can do it then great, but that’s normally not the situation in which I see postnuptial agreements.
In one of the situations, I see postnuptial agreements a lot is right at the time of separation. So, if, if there’s something going on, for example, I’ll give you an example of something that happened recently as a business owner separating from their spouse. The only thing the business owner wanted is that if that business owner does some sort of deal with the business after the time of the separation, that the spouse isn’t entitled to that now. The spouse still gets any portion of the business before they separated in their value, their fair share. But in this case, this business person wanted to, keep things separate and, and that’s going to enable this person to, to run their business as they see fit for as long as they’re separated. I mean, it’s, it’s a question of they’re, they’re still trying to work things out so they may get back together. They may get divorced. They don’t know. But as long as they’re living separately, they got a postnup.
Or, another time I see postnups is, is after a new marriage when you’re older. I mean, there’s a window of time where it’s acceptable to ask for a postnup, but there are, if you are in a position where a postnup makes sense, and you may be able to ask for it, a consultant attorney, and it’s a good time to think and helps can help keep separate property separate.
So those are just some things to think about in terms of keeping separate property separate. Or as I said, if you’re the person and your spouse are arguing, well, this is separate property and they can’t provide some base level information or provide the details on some of these things. Then it may not totally be separate. It may actually be marital property that you’re, you’re entitled to a sheriff.
Now, the last thing I want to mention on this point, that’s, that’s very relevant is that sometimes things aren’t clear and there are shades of gray. And so oftentimes separate property is not 100% separate and there is a marital component to it. I’ll give you a very common example. Let’s just say you had a house before you got married and that house you, you, you bought before you got married. And then, a few years later, you get married. Your spouse moves into that house. You have your kids, blah, blah, blah, blah, blah. Now let’s say that you decide to renovate the house or put an addition on the house you put in a new deck or a new roof, or a new, a new floor or, another add-on, addition to the house, whatever the case may be.
And that addition to the house substantially improves the home’s value. Well, under that case, oftentimes maybe I’m just making up these numbers, but 70% of the house might be separate property, but the 30% of the house value may be meritable property because of some of those additions you made to it in some co-mingling and gray areas. It is a very tough and confusing and complicated area of family law that applies all the time. And so, the goal I always talk about with people is, all right, well, let’s figure out all the ways we can argue that this is going to be separate property, or if it’s your spouse, all the ways we can argue this should actually be meritable marital property. And let’s just make the best case for you. Because oftentimes, it’s not going to be 100% in one person’s bucket or 100% in the other person’s bucket. And there are a lot of shades of gray when it comes to separate property and keeping separate property separate and, and marital property.
So those are the four things just to think about and keep on the top of your list is the top of your mind, as you’re thinking about separate and marital property and the best ways to keep it separate or prove that it’s not separate. The first is having good records. The second is to avoid co-mingling. The third is to keep track of the income and dividends. And finally is a postnuptial agreement if that is available, or if you had one in place.