The Elephant in the Room: Separate Property

The Elephant in the Room: Separate Property

By John Duffy, CDFA® On 11/15/2024

There are conversations we as CDFAs can expect to be difficult. In fact, there can be traps and pitfalls anywhere, and we must always be aware of our clients’ reactions to navigate difficult discussions successfully. I have learned that clearly defining the steps and the decisions we will be working to find agreement on goes a long way towards setting expectations early. Normalizing conversations about property division and income sharing (and, of course, quantifying its effect with the use of analysis and reports) can help reduce clients’ anxiety.

But in my experience, all that planning, preparation, and progress can be emphatically stalled or derailed by two words: separate property.

Every state recognizes some form of separate property. It often takes the form of assets or property acquired prior to marriage or an inheritance; the 401(k) or pension started prior to marriage, the downpayment for the newlyweds’ home that came from the sale of the former single-life home, a bequest or inherited IRA. Most newly married couples are not contemplating what happens with these assets should they get a divorce down the road. Many couples do not think about “your stuff” and “my stuff” as they struggle to strive and start a family (or not), and it can come as a shock when one spouse declares they want to have it recognized and treated as separate property.

As with many aspects of divorce, there can be black and white clarity, or every shade of gray ambiguity. If the property checks all the boxes and the characterization is clearly separate, it will usually be easier for the other spouse to accept in time. It may be necessary for us to provide the reports and analysis to (hopefully) demonstrate the spouse now receiving less is still going to be financially secure. Divorce coaches and psychotherapists may be helpful referrals to make in this situation, and a consulting attorney is always a role to recommend.

If the property does not check all the boxes, comingling has occurred, or information to demonstrate characterization as separate is unavailable, the interspousal dynamics may be very challenged. It might feel like a betrayal, and of course the subjective sense of “fairness” is unbalanced.

I had an amicable case nearing agreement pause for months and regress. Spouse One had a clearly defined and documented separate property contribution that was invested in the home. Spouse Two had a dubious separate property claim, unprovable due to a lack of documentation, which was invested in stocks. In California, Spouse One would receive a dollar-for-dollar separate property reimbursement for the downpayment, regardless of the growth in equity of the real estate. Spouse Two could receive the benefit of the significant growth of the investments, if traceable. This led to a greater sense of inequality for Spouse One, because they had unwittingly invested a great amount into the family home, which provided for the family’s security and prosperity, but did not receive the benefit of the considerable equity growth. Meanwhile, Spouse Two claimed with great certainty, but without providing the requested documentation, that the investment account and all its growth was all separate property.

Your approach to a situation as above may vary, but I prefer not weighing in on contested legal issues with significant financial consequences. This was an opportunity to refer the clients to a consulting attorney so they could learn from a legal professional if the property meets the definition, and can be proven to the standard of the law, of separate property.

Of course, even this approach may not break the impasse. In this case, each spouse’s consulting attorney provided a different answer. We discovered this was attributable to a slightly different fact pattern that each spouse presented, and it caused confusion and more distrust until it was cleared up.

At the end of the day, what matters most to a mediated settlement is that the clients come to an agreement, which can occur in several different ways: genuine acceptance, compromise, or exploring alternative scenarios. If they cannot come to an agreement on their own, they can consider arbitration, hiring a private judge, or litigation.

Ultimately, our goal as CDFA professionals is to help clients make informed decisions. By understanding the complexities of separate property, practicing effective communication, and exploring various strategies, we can enable our clients make those decisions and move forward.

Tagged with: divorce, separate property, cdfa, finance, income sharing, property division

Blog Disclaimer: The opinions expressed within these blog posts are solely the author’s and do not reflect the opinions and beliefs of the Certitrek, IDFA or its affiliates.