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Protecting Your Inheritance in a High-Value Divorce

Divorce is a complex and emotionally charged process, especially when it involves significant assets. Among these assets, inheritance often holds not just substantial monetary value but also sentimental importance. In California, the law provides certain protections for inheritances in the event of a divorce. 

However, these protections are not absolute and can be jeopardized under certain circumstances. Below, we’ll guide you through understanding how inheritances are protected under California law, the situations where this protection may be at risk, and steps you can take to safeguard your inheritance during a high-value divorce.

Understanding Inheritance and California Law

California is known as a community property state. This designation has significant implications for how inherited assets are treated, both during a marriage and in the event of a divorce.

Separate vs. Community Property

In general, property acquired during a marriage in California is considered community property, meaning it is owned jointly by both spouses. State law requires all community property to be divided equally if a couple chooses to divorce. 

However, inheritances, even those received during the marriage, are classified as separate property. This classification means that an inherited asset belongs solely to the spouse who received it, and it’s not subject to division during a divorce.

Preservation of Separate Property Status

For an inheritance to maintain its separate status, it must be kept distinct from community assets. This separation is crucial in preserving its immunity from being divided in the event of a marriage dissolution. If its status becomes unclear, the inherited assets may be subject to asset division in part or whole. That can be emotionally and financially devastating, especially if you inherit substantial assets like a family home. 

When Separate Property Inheritance Protection May Be in Jeopardy

Normally, the difference between separate and community property is clear. Funds earned during the marriage or acquired using marital assets are community property. Assets predating the marriage, gifts, and inheritances are separate property. 

Despite this clear distinction between separate and community property, several scenarios can complicate asset division, such as:

  • Commingling of Funds: If you blend your inheritance with marital assets, for instance, by depositing it into a joint bank account or using it to fund joint purchases, it can lose its separate property status. This commingling can make it challenging to distinguish your inheritance from marital property in a divorce. It may be necessary to work with a skilled attorney experienced in high-net-worth divorces to help you unravel the commingled property into separate and community assets. 
  • Transmutation Agreements: If you and your spouse agree to convert the inheritance from separate to community property, often through a written agreement, this can place your inheritance at risk during a divorce. Such contracts must be explicit and cannot be based on implied or accidental actions.
  • Use of Inheritance for Marital Purposes: Utilizing inherited funds for marital purposes, such as paying off a joint debt or financing a family home, can also jeopardize its separate status. The key factor is whether the inheritance was used in a way that benefits the marriage or was intended to be a gift to the marital estate. For example, buying a car that only you use with your inheritance may not be considered using it for “marital purposes,” but using that car to take your children to school could muddy the waters. 

In other words, it is possible to purposefully or accidentally blend your inheritance with your marital assets. If you want to keep your inheritance separate, it’s crucial to keep good records and consult an experienced attorney about your concerns. 

Protecting Your Inheritance Before and During Divorce

In divorce cases, the burden of proof often lies with the spouse claiming separate property to demonstrate that the inheritance was indeed separate and wasn’t commingled or transmuted. 

Suppose you have or expect to inherit substantial or emotionally significant property. In that case, it’s crucial to protect it from the outset to ensure it’s not at risk should you get a divorce in the future. Here are some strategies that can help you keep your inherited assets separate and avoid the dangers of commingling property in California:

  • Maintain Separation of Assets: Keep your inheritance separate from your marital assets. This means not depositing it into joint accounts and avoiding using it for communal expenses or investments.
  • Document Everything: Maintain clear records of your inheritance, including documentation that proves it was intended only for you. This includes wills, trust documents, bank statements, and any other relevant paperwork.
  • Create a Postnuptial Agreement: Consider drafting a postnuptial agreement that specifically addresses the status of your inheritance. This legally binding document can outline that your inherited property remains yours alone, regardless of how it’s used during the marriage.
  • Consult with a Divorce Attorney: Navigating high-value divorces and protecting your assets can be legally complex. Consulting with a divorce attorney who specializes in high-asset cases is crucial. They can provide personalized advice and ensure that your inheritance is safeguarded throughout the divorce proceedings.

With clear documentation and purposeful separation of assets, your attorney can likely help you protect your inherited property from division in your divorce. 

Talk to the Experienced High-Net-Worth Divorce Attorneys at Kaspar & Lugay, LLP

Divorce can significantly impact your financial future, and when it involves substantial inheritances, the stakes are even higher. Understanding the nuances of California law and taking proactive steps to protect inherited items can make a critical difference. 

Remember, every divorce is unique, and the best course of action depends on individual circumstances. Seeking professional legal advice is the most effective way to ensure that your interests are fully protected in a high-value divorce. At Kaspar & Lugay LLP, we have years of experience guiding clients through the intricacies of high-net-worth divorce in Corte Madeira and throughout the Bay Area. Get in contact today to learn how we can assist you with protecting your inheritance from asset division during your divorce.