What is separate property?

In general, separate property or non-marital property is any property, real or personal, acquired before marriage, after divorce (or in some states by separation of the spouses before divorce), by gift or inheritance during the marriage, or during marriage with separate property funds. Further, any income made from a spouse’s separate property during the marriage is also usually considered that spouse’s separate property. However, it is important to note that separate or non-marital property is subject to a slight variance in definition depending on the state, and whether the state uses a community property ownership system or a common-law ownership system, otherwise known as an equitable distribution system.

When Separate Property Issues Arise

Separate property issues generally arise in two scenarios: the death of a spouse or at divorce. After a spouse dies, a court will categorize the decedent spouse’s property as separate property or marital property for the purposes of distribution to the decedent’s beneficiaries. This distribution will depend on whether the decedent left a valid will or trust and the type and number of living family members the decedent has.

During a divorce proceeding, one of the primary tasks of the court is to categorize all of the spouses’ property as either separate property or marital property. Categorizing this property is very important, as it will affect the distribution of property at divorce. When a property is deemed a spouse’s separate property, the spouse will generally get to keep the entire property interest at divorce.

Community Property vs. Common Law Systems

To understand the concept of separate property, you must understand the concept of marital or community property. When a property is deemed marital property, the spouses must share or divide their interests in the property, either at death or divorce. Again, while the exact definition of these concepts will vary slightly between states, marital or community property is generally any property acquired during the marriage that does not fall into a separate property category, such as an inheritance or gift. This can include the income of either spouse earned during the marriage, or any other real or personal property acquired during the marriage, including, but not limited to, houses, businesses, cars, investments, bank accounts, furniture or other household items.

A majority of states use a common law system of property ownership. The only states that use a community property system are California, Texas, Arizona, Idaho, Louisiana, New Mexico, Nevada, and Washington. Common law systems treat separate property differently than community property systems. One difference is seen in how the system defines separate property at the outset. In a common-law state, separate property is automatically found when a spouse puts the title or registration to the property solely in their name.

In contrast, when a spouse puts the title or registration solely in their own name in a community property state, this will not be deemed separate property unless the other spouse expressly agrees through writing. For example, suppose a wife, living in a common law state, wants to buy a cabin with her earnings. Now suppose she puts the title to the cabin solely in her name. At divorce, she might be able to successfully argue that the cabin is her separate property, as the title was in her name only. She would then receive the full interest in the cabin at distribution.

If the wife lived in a community property state at the time of acquisition, she would not be able to show that the cabin was her separate property at divorce, unless the husband expressly agreed or declared in writing that the cabin was to be her separate property. This declaration may be in the form of a writing that took place during or before the marriage, such as a pre-marital or pre-nuptial contract. In this case, if the wife is unable to show that the cabin is her separate property, it would be deemed marital property, and she would have to split the interest in the cabin with her ex-husband.

Distribution of Separate Property in Divorce

Another difference in how the two systems of ownership treat separate property is seen during distribution at divorce. All courts in a common law system and a community property system will categorize the spouses’ separate and community property. However, a court in a community property system will only do so to determine which property is marital property, which under a community property system is automatically subject to a 50-50 split.

In addition to parsing out the marital property from the separate property, a court in a common law system of property ownership will consider the amount of each spouse’s separate property when determining how to divide the marital property. This system of distribution is called equitable distribution, and unlike in the community property system, the marital property in a common law property system is not automatically subject to a 50-50 split. At divorce in a common law system, if one spouse has a huge amount of separate property, and the other has very little, a court may award the spouse with very little separate property a larger interest in the marital estate.

Commingling Separate Property with Marital Property

While determining which property is the separate property of a spouse can sometimes be easy, if the spouse has commingled her separate property with the marital property, she may lose her separate property interest unless she keeps records showing her separate property assets. Commingling separate property with marital property simply means putting separate property assets together with marital property assets. For example, consider a bank account with $10,000 in it owned by the woman before her marriage. Since this bank account was opened before marriage, it is the woman’s separate property. This woman then marries and both she and her husband regularly deposit their respective paychecks (generally considered marital property, since the paychecks were earned during marriage) into the account and periodically withdraw money to pay for their living expenses.

Now suppose that the wife dies twenty years later, with a will that leaves all of her separate property to her nieces, and all of her marital property to her husband. The bank account has $5,000 in it, and the decedent spouse did not keep records of her separate property withdrawals. Since the marital property has gone into it, and it is now impossible to trace the original separate property money from that of marital or community property, the decedent’s nieces lose their right to the separate property inheritance. Because the woman failed to keep separate property records, this bank account will be deemed marital property, which will now go to her husband.

Settling Property Distribution Disputes

Because the type of property ownership system and variances between states can affect how separate property is defined, it is important to speak to an attorney in your state whether you are going through a divorce or want to draft a will. On another note, while a separate property definition can be useful during divorce negotiations, it is always better to settle property distribution during divorce outside of the courtroom. If spouses are able to determine the property distribution themselves or through a mediation process with their lawyers, they are more likely to get a result that suits the interests of both parties. Once the divorce case goes to the court to decide, the spouses will have to accept whatever ruling is given to them.

Case Studies: Understanding Separate Property

Case Study 1: Mary and John’s Divorce

Mary and John decided to get a divorce after many years of marriage. During the divorce proceedings, the court had to determine how to divide their assets. One significant point of contention was the vacation home that Mary inherited from her grandmother before their marriage. The court recognized this inheritance as separate property and awarded the vacation home solely to Mary, much to John’s disappointment.

Case Study 2: Sarah’s Inheritance

Sarah received a substantial inheritance from her late parents during her marriage to Mark. She was concerned about keeping her inheritance separate from their marital assets. Sarah consulted with a family lawyer, and together, they created a legally binding agreement stating that her inheritance would remain her separate property.

This agreement ensured that, in case of divorce, her inheritance would not be subject to division as marital property.

Case Study 3: David and Lisa’s Shared Account

David and Lisa got married and opened a joint bank account where they deposited both of their paychecks for household expenses. Later, David received a significant monetary gift from his parents, intending to use it for a personal business venture.

Unfortunately, David didn’t keep clear records of the money’s use, and over time, the gift funds got commingled with their regular income. In the event of their divorce, David faced difficulties proving the original gift’s separate property status, resulting in the court treating it as marital property.