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

You can give away your stuff, but you can’t give away your children

Dear Len & Rosie,

We’re a young couple that just had a daughter three months ago. We have outdated wills, and we’ve been looking at trusts and wills since before our daughter was born. If we don’t have a trust or will and we suddenly passed away, what will happen to our daughter? We want to ask my cousin and her husband to take her if anything were to happen to us. Do we need a will or trust in order to make that legal? What if my mother-in-law suddenly want custody of our daughter? Will that be a legal battle and a judge will decide? Will a will stating that we want my cousin and her husband to take our daughter be enough or do we need a trust in order to avoid problems like that?

Connie

Dear Connie,

You can give away your stuff, but you can’t give away your children. It’s important for you and your husband to make new wills to provide for your new daughter. But it’s just as important to understand that while you can make almost any provision for how your home and life savings are dealt with after you die, you can only suggest guardians to raise your daughter in your stead. Guardians are nominated by parents, just as actors are nominated for the Oscars. A parent’s nominee doesn’t always win, because guardians are appointed by judges, not the parents.

Why is this so? Parents sometimes make mistakes, or time may pass after a will is made and the trusted friend you picked as guardian could turn out to be a bad person. No judge in California is going to appoint a death row inmate as your child’s guardian, no matter what you want. In guardianship proceedings, the judge will take your wishes into account but must ultimately pick the guardian based on what he or she perceives to be best interests of the minor child. Fortunately, it usually takes a pretty good reason to convince a judge to ignore your stated wishes. But you have to state your wishes. That’s why you and your husband need to make wills setting forth your choice of guardians. And if there’s someone in particular you don’t want as guardian, such as your mother-in-law, your wills should say that as well.

Your estate plan should also be designed to protect your daughter from herself. The last thing you should want is for your bright and beautiful daughter to get her inheritance in one lump sum on her 18th Birthday. She’ll be broke by the time she’s 20. It would be worse if you have a son - he’ll spend it all on a car and not bother buying auto insurance. We have seen this happen.

Whether it’s just wills, or wills and a revocable trust, your estate plan should include a sprinkling trust for your daughter. A trustee that you pick will be in charge of your daughter’s inheritance, spending money on her for whatever she needs until she’s old enough to be trusted with the money. Most parents pick age 25, because by that age their child is out of college and is learning how hard it is to save money. And best of all, even if your mother-in-law Cruella somehow gets appointed as guardian, she won’t be in charge of your daughter’s inheritance.

You and your husband should update your estate plan, but if all you want is a quick guardianship nomination, you can download the California Statutory Will form, for free, on the State Bar’s web page, www.calbar.ca.gov.  Click on the link to the left labeled “Public Services.”

Len & Rosie