February 12, 2006

LawGuru Question: One spouse’s planning after marriage

Posted in Planning at 11:00 pm

A LawGuru poster asks: “If I set up a trust for my grown children after I got re-married, does the spouse have any claim to that trust or any assets in that trust upon my death? Specifically, can I set up a separate trust without my spouse having access to it?”

The answer depends on what sort of property you own.

California is a community property state – this means that it’s important to understand the difference between community property and separate property.

Community property is property you acquire during your marriage, typically by working – or property you buy with community property money. (For example, if you work, your paycheck is considered community property – so things that you buy with that money will also be community property.) Community property also includes any interest, dividends, or capital gains earned by community property money or investments. (So, if you put your paycheck in the bank and earn some interest on the money, the interest will also be community property.)
Separate property is property you held before marriage, or property that you gain during the marriage by gift or inheritance. Separate property also includes the interest, dividends, or capital gains earned by separate property during your marriage. (If a family member wills you $1000, that will be your separate property; if you put that money in the bank and it earns interest, the interest will also be your separate property.)

That doesn’t sound so tough – but the hard part is figuring out where money went (lawyers and accountants call this “tracing”) when community property money and separate property money are mixed (“commingled”). If you’ve got a bank account where you deposit your paychecks, and then you get an inheritance, and you deposit the money from the inheritance into the same account .. and then you write some checks out of that account, perhaps to fix up your (community property) house and your (separate property) collectible automobile, it can be tough to determine whether the money that was spent was community money or separate money, and whether you made a gift by spending your separate property money on a community asset (the house) or if your spouse made a gift by allowing you to spend community money on a separate property asset (the car).

(Actually, there are a number of further complicating factors that I’m ignoring in the interest of clarity – if this is an important topic to you, you should sit down with an estate planning attorney or a divorce attorney – depending on your needs – to really pin down the specifics of your situation.)

Upon your death, you have the right to decide who will get all of your separate property, and one half of your community property. (The other half of your community property belongs to your spouse.)
So, if you have property that everyone agrees is separate property, you can give that to anyone you please, and your spouse has no right to object or to interfere. (Similarly, of course, your spouse can dispose of their separate property as they please ..)

You can also dispose of one half of your community property as you please, without your spouse’s consent.

The tricky part here is figuring out or agreeing about the characterization of some property as community property, and some property as separate property – you may think that certain money or certain property is obviously yours .. and your spouse may think it’s obviously community, or obviously theirs. The process is a little bit like negotiating a divorce settlement, without the divorce, because (ideally) the parties will continue to be married, but with a clearer idea of who owns what.

So, to come back to the question – yes, a married person can create an estate plan that disposes of their property to people other than their spouse, and the spouse can’t change it – but this is a delicate situation that requires both careful attention to detail (legal & factual) and a measure of diplomacy, because the process isn’t an easy or a comfortable one. You can ignore the issue (or find an attorney who will ignore the issue) but this simply defers the unpleasantness until after your death. This means you won’t have to deal with it, but it also makes it less likely your wishes will be carried out.