All marriages in California end in death or divorce. If your marriage is ending in divorce, please feel free to read through my postings about divorce and look up my book, Better Divorce: A Handbook for Getting Through the Worst Time in Your Life. If you are happily married, but perhaps have been divorced or widowed previously, chances are that you came to your second marriage with property and/or children.
Definition of “Second Marriage”: any marriage that you enter with property or children. You do not have to have been married previously and this does not have to be your second marriage (it could be your third, or God love your optimistic spirit, your fourth or more).
California Probate Code section 100(a) (the very first Probate Code section) says:
“(a) Upon the death of a person who is married or in a registered domestic partnership, one-half of the community property belongs to the surviving spouse and the other one-half belongs to the decedent.”
The term “community property” is not a lightweight term at all. Estate planning attorneys with little knowledge of family law (community versus separate property) will begin and end with asking what is held in Spouse A or Spouse B’s name (or held jointly) and refer to those items as “community property.” Anything held in one spouse’s name alone will be considered “separate property.” The analysis will begin and end there. A decently detailed estate planning attorney will ask if you inherited anything from your parents or if you owned anything prior to getting married the second time (or first, if you came to the marriage with assets or liabilities).
Almost zero estate planning attorneys will ask you:
- Did you start your business before the second marriage?
- Did you contribute to your pension before the second marriage?
- Did you contribute to your retirement account before marriage marriage?
- Did you have an investment or brokerage account before the second marriage?
- Did you own a house before the second marriage? Is it the house you live in now? Is it a house you sold to help buy or improve the house you live in now? Did you inherit money that you used to help buy the house you live in now? Did you add your second spouse to title to the house you had before marriage?
- If you still own the house you owned before marriage, in your name alone, did you refinance the home during the second marriage? Did you use your income from earnings during your second marriage to pay down the mortgage (or did you use your spouse’s income to pay down the mortgage)?
- Did you own crypto before the second marriage?
- Did you have cash before the second marriage?
- Did you have a personal injury settlement for injuries that you suffered that you used to buy property during the marriage?
- Did anyone give you a gift during your second marriage?
- Did anyone give you an inheritance during your second marriage?
And then, if they do ask you these questions, they won’t know what to do with the answers. The family law cases See v. See and Marriage of Mix among others (Marriage of Ciprari, Marriage of Bono, Marriage of Branco) all tell us how to handle assets that have a mixed or commingled character. Some of the cases tell us that money never changes character, but it gets more difficult to trace. That means that if you deposit $100,000 of separate property into a joint account, it is still your separate property $100,000, even if you thought you were making it community property by commingling it with community property funds. If you withdrew it two days later (for example, if you sold a separate property home, deposited the proceeds in a community property account and then used the proceeds as a down payment on a new community property home two days later), it could be very easy to trace. You show that the house you sold was your separate property, that the money “bounced off” a community property account and landed in the down payment for the new house. But if you sold that same house, deposited it into that same joint account and left it there for 7 years until you bought a new house, depositing and spending out of that account all along, proving that the $100,000 is separate property is still very doable, but more challenging.
This is not the post to describe the detailed nuances of community and separate property characterization, but to tell you how property charactierzation can be so expensive and complex. If the world is perfect and each of you had nothing when you got married and at death or divorce all of the children you have in the world are your together and all of the money you have in the world is yours together and no children are wayward or mentally ill or illegitimate (boy of boy, that’s a dated term) and neither of you got an inheritance when your parents died, etc., then the division of assets or the transfer of assets may be relatively straightforward.
But, even small perturbances in the “perfect world” scenario start causing large rifts downstream. If Husband enters the marriage with a home he inherited with a mortgage on it and the spouses live in the home for ten years, paying down the mortgage and then Husband adds Wife to title after ten years and they pay down the mortgage for another ten years then refinance the house to buy a lake house and then retire both mortgages with income from earnings, the characterization of community and separate property gets very complex.
In my aforementioned book Better Divorce: A Handbook for Getting Through the Worst Time in Your Life, I spend 200 of the 400 pages giving you a detailed description of the community and separate property characterization issues that most commonly arise, and even then, I still get stumped by new questions every day (who owns the baby horses that are a product of Wife’s separate property brooding mares when the community paid the stud fees? Who owns unvested SpaceX stock options? Is a part interest in a Real Estate Investment Trust (REIT) an interest in real property or an investment like the stock market?). Getting that book for estate planning, though, is a little like hammering a nail into the wall with a sledgehammer; there is plenty in that book about divorce that is not relevant to estate planning. Until my follow-up book, tentatively titled Estate Planning for Second Marriages: What’s Yours, Theirs, and Ours, the Better Divorce book can be a very good resource. I have elected to self-publish both books because I want to keep control over them and be able to update them as needed. This also keeps the price much lower.
I crossed over from Family Law, in which I am a Specialist, Certified by the California State Bar, into Probate matters because of Probate Code section 100(a). I got engaged to do work on probate matters when it became clear that many estate planning drafting attorneys did not know much about family law (and one screamed at me once: “Jude, I don’t give a fuck about the family law! The family law is for losers and idiots!” I’m sure he was hyperbolizing because he was just mad at me, but the feeling runs very deep among lawyers that family lawyers are at the bottom of the heap. The characterization is both unfair and untrue on the one hand and not entirely without cause on the other. Much of family law is emotional infighting between spouses. Much of probate law, however, is emotional infighting between siblings (or stepchildren and stepparents). The degree of ugliness knows no bounds in either instance. However, property characterization (community or separate) is highly complex and involves a wide array of valuations and forensic tracing.
In California, before parties sign a prenuptial agreement, they must provide each other with a snapshot of their current financial picture before a prenuptial agreement will be considered valid. The logic for this is that each party must share its separate property picture with the other so that each may know the starting grounds at the beginning of the marriage. This is, in part, so that they will have full knowledge of the financial circumstances that they are foregoing in the second marriage.
I am one of the few family lawyers who believes in marriage and believes that a prenuptial agreement starts a marriage on bad footing (because it says, “here is what you will get if we later divorce,” which may be a dose of realism but it is also not very romantic). So, I do not like prenuptial agreements because they take away so much of the joy of getting married.
But, I do like the separate property audit going into the second marriage. The thing is that the Family Law already takes care of most of the property issues in a second marriage, but they can be very difficult to trace. Doing the separate property audit before the second marriage can make it so much easier to determine what is yours, mine and ours during the marriage. But, if you are reading this blog post, you probably don’t have a prenuptial agreement and probably didn’t do a separate property audit before your second marriage. Now you want to do some estate planning.
Back to the beginning: marriages end in one of two ways: death or divorce. If you divorce, you will hire lawyers to do a community property audit. They will determine what is community and separate and every single issue will be a fight with contested values for each thing. There will be questions about what you can prove and what you cannot. It will be more of a “proof” battle than an opportunity to learn. There will be pressure. And pressure makes people make mistakes and it makes them angry, sad and/or withdrawn.
We perform a community property audit for second marriages as an offering to our clients. The audit is not under pressure and the parties are not fighting (hopefully). The audit helps spouses understand what each of them has as they do their estate planning. It also helps them understand what they will get if the other were to suddenly pass away. It is an opportunity to provide one another with relief, which is exactly what an estate plan does.
**Little known fact: if you make a trust during your marriage and you title all of your assets, community or separate, in the trust, all you will have done is move your community or separate property assets into the trust. You will not have changed the character of the property from separate to community. If Husband moves his house from before the second marriage into the Trust, it is still Husband’s house, now titled in the name of the Trust. If Wife names the Trust as the beneficiary of her separate property IRA, the IRA is still separate property. We have several court cases that tell us that the mere retitling of assets into a tax vehicle does not change the character of the assets.
The audit will do a deep dive into what you brought into the marriage and what you received by gift or inheritance during the marriage. It should be performed by a family lawyer with a deep working knowledge of family law. You should expect to spend $6,000-$12,000 on it depending on the size and diversification of your portfolio – obviously simpler portfolios may not need a full audit and larger, more diverse portfolios may require more depth.
**Math Pointer: Estate planning attorneys who charge $1500 for a trust have to make an hourly wage for their work. Most lawyers charge between $350 and $600 per hour. This is obviously a lot of money, an obscene amount of money, but the money pays for staff, rent, software, overhead, and insurance. A lawyer cannot run a reasonable practice billing less than $350 per hour. That means that this lawyer will put no more than 4 hours into your trust for $1,500. Perhaps fewer than 3 hours. That means that you will have a trust when it is all over. You will have documents that satisfy the language of the probate code and the IRS and your bankers, but the trust may or may not say anything useful. It will not be tailored to your needs. It will have 18-26 pages of boilerplate text and two or three operative paragraphs about how you want your assets distributed. And those paragraphs will be quickly drawn based on a questionnaire you filled out. There will be little or no distinction between your community and separate property assets. It will likely not distinguish between your spouse and your children (not in any thoughtful way). The drafting lawyer just won’t have time. Most drafting lawyers that do $1,500 trusts never even touch the trust at all. They may have an intake person, who is not a lawyer, meet with you and go over a questionnaire. They may or may not review the questionnaire. They will use a computer drafting program to generate a boilerplate trust with your answers to the questionnaire. They will put the entire thing in a fancy binder with some other documents. They will add gobbledygook pages, sometimes hundreds of them, that amount to nothing that you will do anything about or even read in order to make it look like you have something very substantial for your money. But there will be a few operative paragraphs in the entire thing that mean anything.
When we do a community property audit, we go through all of your books and records. In an ideal world, we will perform the audit within 7 years of your second marriage date. 7 years is the magic amount of years that banks store client data. We will analyze the separate and community property investment by each spouse at the beginning of the marriage, the performance of those investments during the length of the marriage, the additional contributions by the community during the marriage, the changes in real property ownership and title, mortgage loans, Home Equity Lines of Credit, the value of classic cars and work trucks, an analysis of separate property businesses (I am a lawyer, for example, about to embark on a second marriage).
We would characterize all of your assets as separate or community. We would not have a fight or time pressure. If we are uncertain, we tell you the uncertainty and why. We give you a document that lays out the community and separate character of the property so that you understand it.
Then, we work together to craft an estate plan that is right for you. This is a big investment, but, in terms of both financial costs and emotional tolls that may come later, the investment is worth it, often on a scale of 10x to 50x. I have written widely on disaster and crisis management and one thing that is proven true repeatedly is that $1 of prevention can save up to $30 in response and recovery. Once we have performed the full community property audit, we can reasonably plan your estate.
