Community and Separate Property

Dear Len & Rosie,

My sister and I inherited a two million dollar apartment building. My wife of thirty-one years and I have a trust. I have no problem adding her name to the deed as a trustee, but could I stipulate in an agreement with my wife that if she asked me for a divorce down the road she would give the property back to me?

Douglas

Dear Douglas,

Everything you and your wife acquire during your marriage as a result of your labor is community property. But you did not earn your inheritance. Everything you inherit is your separate property, and will remain separate property unless you do something to transmute it into community property. California law requires an express transmutation in a writing that clearly states you are converting your separate property to the community property of you and your wife.

The trust documents we draft for married couples include a provision that says putting property into the trust, or taking it out of the trust, will not change its characterization as either separate or community property. Because of this provision, your inheritance should not be transmuted into community property if you put it into your revocable trust, even if your wife is a trustee. Our trust documents also allow either spouse to hold his or her separate property in his or her name as sole trustee, even though both spouses are trustees of the overall trust.

But that’s not playing it safe. We did not draft your trust document, so your trust could say otherwise. If you sign a deed putting your half of the apartment building into your joint trust and you get divorced later, your wife can make things very difficult for you. Remember the old saying that possession is nine-tenths of the law? If the two of you get divorced, she may refuse to sign a deed putting the property back into your name, even though it belongs to you alone. It would make your divorce more expensive than it would be otherwise if you have to fight her over this.

It’s a silly rule, but the best way to keep your separate property separate is to keep it separate.  The cautious thing for you to do would be to keep the property out of your wife’s name, even as a trustee. Create a new revocable trust just for your separate property. Keep it separate by never, ever transferring anything into your separate property trust that can be traced to any community property source. Name the children as your successor trustees instead of your wife. Or, consult with your estate planning attorney and review your trust to verify would happen to your apartment building if you were to get divorced.

On the other hand, you and your wife have been married for over three decades, and you can be fairly sure that she hasn’t stuck with you this long just to cash in on your inheritance.

Len & Rosie