Thursday, November 28, 2019
Many states that are community property states declare that property that is inherited is categorized as separate property rather than part of the community estate. In California, the 5th Court of Appeals has ruled that for assets to remain separate property, they generally must have been acquired through direct inheritance, meaning inherited from one's parents.
George Deluca settled with his two siblings after numerous years over a trust his father had that held his real estate after the father died in 1990. In 1996, George agreed to waive any right or claim to any other property of the trust in exchange for title to three properties. In 1997, George and his sister entered into an “Amendment to Settlement Agreement,” under which the sister agreed to transfer the Florida Street property (an apartment complex) that had been allocated to her to George in exchange for cash and a promissory note. In 2011, George and his wife divorced, and George claimed that the Florida Street property was separate property as it was inherited. The San Diego Superior Court judge agreed, and the wife appealed.
While George and his sister chose to characterize his acquisition of the Florida Street property as an “amendment” to their trust litigation settlement from the year prior, the Court of Appeals looked through that description. The court found that George purchased the Florida Street property from the sister at a time when she had sole ownership of it. Thus, George’s acquisition could not be deemed an “inheritance or devise” and instead the general community property presumption controlled.
A negotiated allocation of assets from a trust or estate is like slicing up a pizza. As a beneficiary, you bargain for and get to keep as your separate property the particular slice you receive. However, if you later acquire (purchase, are gifted, etc.) another person’s slice of the same pizza, it presumptively will be one that you must share as community property with your spouse.
See Jeff Galvin, Your Slice of the Pizza – Only Directly Inherited Asset Qualifies as Separate Property, Trust on Trial, November 25, 2019.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.