Author Topic: Protecting Sole & Separate Property in Marriage (CA) - How to Hold Title?  (Read 47602 times)

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Offline SoCal

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Anyone is welcome to respond with experience or guesses.

Scenario

Roxy and Jon are a married couple from California. Roxy is to receive a sizable family inheritance. Under California law, inheritances are excluded from community property so long as they are not co-mingled, even for a day -- no "post-nup" needed! To keep Roxy's (monetary) inheritance her sole and separate property, she must have the money kept in an account with only her name on it and not Jon's. If it was to be co-mingled by being deposited into their joint bank account, then sent to Roxy's own account, it would still be community property. There are no "do-overs"!!

Challenge

Roxy wants to use the funds to purchase some real estate. She wants to finance it / them. A portion (some or most) of the down payment would come from her separate account. The second portion comes from their joint funds. Either way, Jon would be on the title. Roxy's goals are:

- Equal rights to enjoy the property/ies for as long as they are married
- If Roxy dies before Jon, Jon to easily take control without need for a will or probate, etc.
- In the (very remote) chance of a divorce, Roxy and Jon can easily draw a line dividing who owns what, with Roxy retaining her ownership that was purchased by her sole & separate money. Again, Roxy needs to be very careful to not, for a second, give way to labeling her funds as community property.


Question

How should Roxy and Jon hold title?

Investopedia gives the five most common ways:

- Joint tenancy
- Tenancy in common
- Tenants by entirety
- Sole ownership
- Community property

Has anyone been in Roxy's shoes before? Of course, Roxy will confirm with a professional before making any final decisions.
« Last Edit: August 20, 2012, 05:40:58 PM by SoCal »

Offline 'MERICA~ FVCK YEAH~

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this is tough man, cause i read somewhere california just sees everything after marriage as community property, which to me being self employed, is a issue... it means my future wife will automatically own 50% of my company... im fine with that, but what scares me the most is because of this law, if i am sued one day for individual related incidences even with my LLC, they are entitled to go after my personal assets, which would also include 50% of whatever my future wifes assets are under CA law... it just so happens my gf/fiancee is self employed too so she has her own firm, so techinically ONE individual related lawsuit (not protected by either of our limited liabilities) can bring down BOTH companies... so for us, the only way is a prenup/postnup what nots...

with ur case, i believe the minute roxy uses her name to buy any real estate/asset/stock regardless if held by herself or in community, the significant other is entitled to half regardless under california law... the only way i know how to protect it is to have a prenup/postnup and hold title as an individual to gaurantee no hastle... but i have heard cases where even WITH prenup/postnup + holding title as an individual, the spouse if she decides to sue can still get at that property... california is just lame like that... pays to marry up i guess... there really is no 100% gauranteed way...

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Offline SoCal

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On second thought, Jon taking control easily upon the untimely demise of Roxy may not be a tip-top priority in deciding how to hold title. Jon and Roxy do have kids who are minors at this time. Roxy would not want the money to leave the family: i.e. Roxy dies, Jon takes a new wife, then Jon dies, leaving the new wife with all of Roxy's assets and none going to Roxy's kids. Roxy wants the assets to stay in the family, but be considerate of Jon, too. (Wouldn't want the kids to get totally screwed over.)

Offline 'MERICA~ FVCK YEAH~

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if thats the case, i would suggest putting asset in trust fund with specific requirements (who, when, where, what, why) can get at the money/assets...

sorry my knowledge on this is quite limited... cant really help u out... but if u do find a solution, definitely share... im sure when i get older and have kids, id probably bump into something similar

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Offline SoCal

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Thanks for giving it some thought.

Regarding assets / stock / real estate - my understanding was the appreciation of it or dividends earned by it is what's potentially debatable during divorce proceedings as community property even if the underlying asset itself is sole and separate property.

As far as I know, there is no debate regarding gifts / inheritance given by a third party to one person in the marriage . It is sole and separate property, period, even in a community property state. Same with what was owned by one spouse previously before entering the marriage and same with debt incurred by one spouse before entering. Ex: Jon had student loans before he married Roxy. Roxy wasn't responsible for a nickel of his student loan debt because it was incurred by him and him only before they got married.

Only Roxy is named to inherit the trust fund, and that was created long before Jon came into the picture.

Yes, I think you're right. Roxy should probably set up a new trust fund. Roxy's children did not exist at the time the current one was created, when Roxy was just a child herself. Yeah, maybe Roxy should only buy real estate and not have Jon's name on the deed if that's possible(?). Then, Roxy can create a will splitting her assets three ways between Jon and their two kids. Jon shouldn't care if his name is on the deed/s.

Offline Irvinecommuter

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Without commenting to the specifics...here is my law school review of community property (no legal advice intended...use at your own risk)

Baseline is that everything is community property unless otherwise proven.

Easy issues:  Inheritances and gifts specific to one spouse, property owned by one of the spouses before marriage, successor properties that originally derived from separate property (i..e house entirely bought with inheritance or gift, 1031 trade etc.)

Slight more complicated issues:  Property acquired with community property assets but specifically designated as the property of one of the spouses.  In essence, one of the spouse is voluntarily giving up his/her right to asset.  This must be done in writing and for purposes of real estate, the title would say something like Jane Doe, solely as her property.  An outside agreement establishing the designation is also helpful (but not required).  This can get tricky cause the spouse can later claim that s/he was tricked into such an arrangement.

Very complicated issues:  co-mingling of funds to acquire assets.  Generally, when you comingle funds...it become community property.   If you use that fund to acquire assets, the asset become community property.   Issue arises when separate funds are used as down payment while the remaining obligation is paid by community property funds.  If the down payment not to big, the rule is to pay back the down payment to the separate fund spouse and split the reminder as community property.  If the down payment is significant, the spouse with the separate funds contribution  get the corresponding portion and the remainder is split as community property.

For example:
Jane contributes $50,000 of her separate funds to buy a house worth $350,000...mortgage payment is paid by community property.  The house is completely paid off.  The house is now worth $500K.  At divorce, Jane would get her $50,000 back and the couple would split the remaining $450,000.

Jane contributes $175,000 for that same house, the Court is likely to rule that she owns 50% of the property outright and the couple would split the remainder.  So, Jane would get $250,000 for her share alone and the couple would split the remain $250K.

Back to your scenario:

I would say it does not really matter how the title is held.  You can hold it anyway you like as long as you like but set forth the terms in a separate agreement would trump the general rules.  Death is completely different issue since there is "no community property" at the point, the default probate says that the whole thing goes to the surviving spouse.  You make wills/trusts to say otherwise.

Offline kalbi

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Thanks for giving it some thought.

Regarding assets / stock / real estate - my understanding was the appreciation of it or dividends earned by it is what's potentially debatable during divorce proceedings as community property even if the underlying asset itself is sole and separate property.

As far as I know, there is no debate regarding gifts / inheritance given by a third party to one person in the marriage . It is sole and separate property, period, even in a community property state. Same with what was owned by one spouse previously before entering the marriage and same with debt incurred by one spouse before entering. Ex: Jon had student loans before he married Roxy. Roxy wasn't responsible for a nickel of his student loan debt because it was incurred by him and him only before they got married.

Only Roxy is named to inherit the trust fund, and that was created long before Jon came into the picture.

Yes, I think you're right. Roxy should probably set up a new trust fund. Roxy's children did not exist at the time the current one was created, when Roxy was just a child herself. Yeah, maybe Roxy should only buy real estate and not have Jon's name on the deed if that's possible(?). Then, Roxy can create a will splitting her assets three ways between Jon and their two kids. Jon shouldn't care if his name is on the deed/s.

have Jon sign a quitclaim deed so only Roxy's name is on the title.

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Online qwerty

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Regarding assets / stock / real estate - my understanding was the appreciation of it or dividends earned by it is what's potentially debatable during divorce proceedings as community property even if the underlying asset itself is sole and separate property.

this is my understanding as well for appreciation of assets/stock/real estate brought into the marriage.

Offline Irvinecommuter

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Regarding assets / stock / real estate - my understanding was the appreciation of it or dividends earned by it is what's potentially debatable during divorce proceedings as community property even if the underlying asset itself is sole and separate property.

this is my understanding as well for appreciation of assets/stock/real estate brought into the marriage.

Actually no.  The appreciation retains the nature of the underlying asset.  If the property is sole and separate property, the appreciation is separate property.

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Offline SoCal

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Regarding assets / stock / real estate - my understanding was the appreciation of it or dividends earned by it is what's potentially debatable during divorce proceedings as community property even if the underlying asset itself is sole and separate property.

this is my understanding as well for appreciation of assets/stock/real estate brought into the marriage.

Actually no.  The appreciation retains the nature of the underlying asset.  If the property is sole and separate property, the appreciation is separate property.

If community funds are used to pay the mortgage, then I do believe the equity earned from that point forward is part of the "Moore Marsden Rule", no? That should be community interest. There is a Moorse Marsden formula for calculating community interest on "appreciation during marriage" from a sole and separate property (i.e. a home bought by one spouse before marriage). Roxy might have to be careful not to accidentally grab the wrong checkbook when paying the bill!

Offline Irvinecommuter

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Regarding assets / stock / real estate - my understanding was the appreciation of it or dividends earned by it is what's potentially debatable during divorce proceedings as community property even if the underlying asset itself is sole and separate property.

this is my understanding as well for appreciation of assets/stock/real estate brought into the marriage.

Actually no.  The appreciation retains the nature of the underlying asset.  If the property is sole and separate property, the appreciation is separate property.

If community funds are used to pay the mortgage, then I do believe the equity earned from that point forward is part of the "Moore Marsden Rule", no? That should be community interest. There is a Moorse Marsden formula for calculating community interest on "appreciation during marriage" from a sole and separate property (i.e. a home bought by one spouse before marriage). Roxy might have to be careful not to accidentally grab the wrong checkbook when paying the bill!

Again, it depends on the amount of your initial investment.  If it is "small", it is deemed as a interest-free loan to the CP that gets paid back when the asset is sold (please don't ask what happens if those funds are then used to buy another property).   If it is significant, then it is viewed as a share of the property (i.e. 25% DP means 25% interest).  When the appreciation happens does not matter...it is what the nature of the original investment determines the division.  The idea is that if the the investment is significant, there is an intent by the couple to keep the investment separate.

Again, the easiest way to do this is have a separate agreement specifically laying out the division.  The title on the property itself is probative but not determinative. 

Offline Irvinecommuter

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One more thing...things get seriously complicated if you are talking about property acquired prior to the marriage.  It that's the case, you have to figure out the amount of principal reduced.  In that case, there needs to be a analysis of what portion of the reduced principal came from SP v. CP.

I will use the calculation in Moore and Mardsen

In Moore:

Purchase Price: $56,640.57.
Down Payment (W):  $16,640.57
Pre-marriage payments:  $245.18 (principal reduced)
Post-marriage payments:  $581.07 (principal reduced)

Marriage:
Payments:  Reduced principal by $5,986.20

Equity on property at time of divorce:  $126,812.45

Cal. SC calculated

CP only contributed to 10.57 percent of the principal reduction ($5,986.20/$56,640.57) and the CP is $16,911.29 (10.57% X $126,812.45).

The wife is then responsible for paying off the loan.

Marsden is similar except that it accounts for appreciation between acquisition and marriage.  Any appreciation that takes place prior to the marriage is deemed SP and calculated accordingly.

In Marsden, the Husband paid $8,300 for a $38,300 loan.  The property went up in value to $65,000 prior to the marriage. 

CP paid down $9,200 and the Husband paid down an extra $655 after divorce. 

FMV for the home at trial was $182,500.

Mardsen court calculated that CP owed a 14.15 % ($9,200/65000)...thus the husband gets 85.85% as SP and 7.075% as his 50% of the CP. 

Moore/Mardsen is only useful though if the property was SP prior to marriage.  It is actually the reverse rule for properties acquired after marriage.

« Last Edit: August 21, 2012, 03:39:24 PM by Irvinecommuter »

Offline 'MERICA~ FVCK YEAH~

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this is pretty interesting... ill definitely look into all the info ppl have supplied... its fantastic knowledge...

Offline Cubic Zirconia

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Interesting thread. I have no clue what happens if we divorce.
Anyway, since everyone is offering their two cents, what happens if Roxie owns too much jewelry? Will that be divided among both in case something goes wrong?
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Offline SoCal

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Interesting thread. I have no clue what happens if we divorce.
Anyway, since everyone is offering their two cents, what happens if Roxie owns too much jewelry? Will that be divided among both in case something goes wrong?

It depends how Roxy acquired the jewelry. If it was gifted to her by her grandmother, it is sole and separate property. If she bought a halo ring at Costco with the Amex that is paid with joint checking, it is community property. If her husband buys it for her - I am not sure but I think it's a gift.

Either way, Roxy will keep the jewelry - once she poses the same questions to her engineer husband regarding his computers and electronics.  ;)

 

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