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135: Character Matters Part 2: Estate Planning for Community Property vs. Separate Property

If you missed the first episode of our “Character Matters” mini-series, we discussed the differences between Community and Separate Property and why the “character” of your assets matters in estate planning. As a quick recap: Separate Property includes assets owned before marriage or received as gifts or inheritances during marriage, while Community Property consists of assets acquired during the marriage.

Now, as we start Part Two, we’re delving into the deeper details of property types and how specifically to estate plan for each of them. Join us as we explore important topics such as whether you should consider a pre- or postnuptial agreement, what to consider when signing one, and how the process works. Whether you’re single, married, or even remarried, this episode is a treasure trove of valuable information, so don’t miss out!

Time-stamped Show Notes:

0:00 Introduction

0:45 We’re getting straight to the point: Character matters when estate planning because you can’t give away what’s not yours. Sounds simple, right?

2:55 If you’re interested in estate planning for your second marriage, you’ll want to listen to this portion as we discuss how the type of asset affects what you can do with it.

4:01 Even though you can’t personally choose whether an asset is legally considered Community or Separate Property, you can change its character. Here’s how.

5:39 Is a prenuptial agreement right for you? Here’s an example of when you might want to consider one and what you can include.

6:41 Postnuptial agreements can also be an option if you’re already married. If you’re doing your estate planning with us, we’ll work with a family law attorney who can help navigate the process.


Hello, everyone, and welcome to Absolute Trust Talk. I’m Kirsten Howe. I’m here with Madison Gunn, and this is another episode in our mini-series, Character Matters.

If you didn’t catch the first episode, it’s short. You can go back and listen to that if it helps you understand this one. Basically, we were talking about the difference between Community and Separate property and some of the reasons why it matters.

We’re going to focus on why it matters to us as estate planners and to our clients. We’ll discuss what we are looking for and what we are concerned about when planning with people who have both Community and Separate property.

Madison, what would you say is the biggest lesson and takeaway here when we’re doing estate planning?

Why it matters so much to us and why we’re nitpicky and annoying about driving the point home is you can’t give away what’s not yours. If you have Community Property, your spouse is entitled to half of that, and you can’t give that other spouse half away. That’s their decision. We’ve seen this where, in the situation, it wasn’t anything untoward; it was like an accident. But sometimes, people will say, “I want my kids to have my entire IRA. I don’t want it to go to my spouse.” But if that IRA was earned from earned money during your marriage, there’s a Community Property interest in it, and you can’t give away your spouse’s share of the Community Property or their half of the IRA.

Obviously, that can get very complicated. We’ll stick with the high-level conversation about that because we don’t do the math that family law attorneys do to determine how much interest everybody has. That’s not the math we do. We need to make sure things add up to 100%. That’s the big part that we are concerned about.

An important point to infer from that is that this is not just important in terms of how we write a trust or a will. There are lots of other ways that people leave assets or give assets to people. There are IRAs and life insurance policies. You cannot make somebody other than your spouse the 100% beneficiary of a life insurance policy if that policy was paid for with Community Property. Your spouse owns 50% of that death benefit.

What if you have a bank account just in your name and put a beneficiary on it? But that money was your income during your marriage. This can present itself in all contexts, not just when sitting in your attorney’s office planning out a trust or a will. But that’s what we do, so we talk about that too.

We have clients who will come in and say, this is really funny to me. I’ve said this many times before the second marriage, and they came in to do estate planning together for the first time because it’s common. They’ve been married for eight to ten years. That’s the timeframe that I see. Half the time, when a blended family comes in, it’s like, “Okay, I guess this second marriage will work. Now we’ll do estate planning.” So, they come in, “Oh, I had this when we got married. I had that when we got married. And now we have this together, Separate, Community.” But as we talked about last time, it’s not that clear.

People will come in and tell us what their Community and Separate property is. Unfortunately, as we discussed in the first episode, the character is defined by its definition. When and how you acquired it, determine whether it’s Community or Separate property—not you.

However, you can change that character. You do have the option to do that, not in our office. We don’t do that. Changing the character of an asset, in other words, pointing to that asset and saying, “This is my Separate property, but I want it to be Community Property.” That’s called transmutation. Transmutation means change. And you can do that.

First, it must be in writing and signed by the person impacted by that. If you’re changing your Separate to Community Property, the person whose Separate property it was is the one who has to sign it. If you’re doing the opposite, going community to Separate, then both spouses need to sign that so you can change it. Sometimes, that makes sense for tax reasons or just for marital reasons. You want that for your spouse.

But when it comes to more than just one piece of property, because that one asset, or one piece, typically, we see it on a house. On real estate. That’s typically where we see it in real estate. The language has to be very explicit on the deed or whatever you’re doing to change the character and be signed by everybody. It’s not something you can just put both your names on; that doesn’t make it Community Property. That’s not how that would work. You have to have explicit language that says this is a transmutation. That’s how that would work. That word is very specific too, one of those legal terms.

However, if you’re changing all of your assets or you’re confirming what is Separate and what is Community—this is how we’ve been treating it, but we want to make sure that this is how it stays—you have to do either a prenuptial or premarital agreement prior to marriage or a postnuptial or postmarital agreement after you’re married.

A prenup could say something like, “This list is my Separate property. This list is your Separate property, and we both agree that no matter what happens, it doesn’t matter who pays the mortgage, who pays the property taxes, who pays for the new roof, it will remain our Separate property.” You can have an agreement like that. It can say, “My income stays my Separate property.” You can agree to all kinds of things that are different from the law. You can do that in a prenuptial agreement or a postnuptial agreement. If you didn’t have a prenup but now you see the value in doing that, which is typically because your estate planning attorney tells you you need to do this.

That’s where we engage a lot with family law attorneys because—why do we use family law attorneys for this, Madison? Because how you do a prenup or postnup is wildly different in terms of procedure.

A prenup and a postnup are different, and we don’t know the procedure because it changes. Every time a major court case or a major divorce case goes to litigation, that procedure might change a little bit.

When I was in law school, there was a seven-day waiting period before getting married. You could not force someone to sign a prenup the day of the wedding or the day before. There had to be a waiting period. I’m sure there still is, but it changes, so the family law attorneys, the law is such that they have to be involved. They have the expertise. They know the family law code and the case law because that’s their area of the law, that’s not our area of the law.

We team up with them when we need a family to have a postnup. It’s usually a postnup that we’re insisting upon, and they do it right. Because if you don’t do it right, it will not be enforceable. There are many disclosures where you must let the other spouse know everything. All kinds of little procedures have to be done. And everybody has to have their own attorney. If you don’t and agree to use one attorney, there are probably extra procedures to ensure that that agreement is solid. All things that we don’t deal with daily. So we use family law attorneys to bring them in just as they would not be writing your will. The family law attorney is not going to write your will. They’re going to call us. Everybody has their own little niche area.

We stay in our own sandbox. We don’t try to jump into anybody else’s. We have to know a little bit. We have to know Community and Separate to explain it to clients. We have to know enough to know that we don’t want to commit malpractice to get our clients in trouble. We don’t want to write a trust that they don’t have the authority to give those assets away. And then there’s litigation because we don’t do that either. It’s all about ensuring it’s smooth after you’re gone. And you’ve got to get the correct documentation in place. Anything else we want to say about that?

No, it’s important that as much as we all want to say what’s Community or Separate, you don’t get to decide arbitrarily. Even if it’s not arbitrary, you’re like, “I inherited that. It’s mine. It’s 100% Separate property.” Are you 100% sure? If you’re not, you should have an agreement with your spouse in writing. Most of our married couple clients have a joint revocable trust. That’s their main estate planning vehicle. But we have quite a few clients where one spouse or both spouses have significant Separate property, and they want to keep it Separate. So those families will have a wife’s Separate property trust, a joint trust, and a husband’s Separate property trust, one or two of those three. That’s not unusual. Keeping things Separate is often a good thing.

It might be that they don’t need a prenup or a postnup. They might say, “Okay, my parents died. I’m going to inherit a million dollars’ worth of assets. Let me set this Separate property trust up to receive it.” The spouse’s name’s never been on it, nowhere near it. Obviously, you still have to worry about mixing, but if you have a million dollars in assets, it’s probably generating some income to pay towards expenses. If you’re able to keep all the Separate, separate, obviously. Co-mingling is where that’s going to be a big problem. But again, it’s not a 50/50 problem, just an interest problem. It’s not uncommon for us to engage family law attorneys or forensic accountants to try and figure out how to pull things apart. We’ve had to do that. We’ve had that scenario where the stepchild and the stepparent now own a house 50/50. How are we going to deal with that? How do we make that work for the family?

That’s a further lesson in the Community Property versus Separate Property Character Matters world. Thank you all for joining us. I hope you learned something. Madison, thank you. We look forward to connecting with you next time.

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