How Can Separate Property Become Marital Property?

Marital property, also known as marital assets, spousal assets or community property, matters when it comes to taxes, estate law and divorce. In most cases, separate property applies to the assets you own going into a marriage; marital property, on the other hand, applies to the assets you acquired during the marriage. However, the lines between these categories can blur – it’s known as commingling – and when that happens separate property can become marital property. If you mix separate and marital assets, all of those assets can become part of the marriage and (therefore) considered marital property. Here’s how it works.

Consider working with a financial advisor as you consider the impact of marriage on your assets.

What Is Separate Property?

Separate property means anything that belongs to you as an individual. Your spouse doesn’t have any claim on it. There are two major categories of separate property. First, this applies to assets that you owned before getting married. For example, say that you buy a used Ford Fiesta. Then, some years later, you get married. You will still own the Ford Fiesta as separate property because it was yours before the marriage happened.

Second, this generally applies to assets that you receive as a gift, inheritance or other form of unilateral transfer. For example, say that you receive a $100 gift card to Applebee’s for your birthday one year. That gift card remains your separate property regardless of marital status.

What Is Marital Property?

Marital property means assets or property acquired during the marriage. It’s important to understand that this only applies to the time after the couple legally became spouses. Property acquired during the relationship, but before the legal marriage, remains a separate asset.

The definition of marital property applies to assets earned, purchased or acquired in just about any way other than a unilateral transfer. For example, say that you have a job earning a regular salary. Then you get married. From the date of the wedding onward, your income becomes marital property because you earned it during the marriage.

In theory, the difference between separate and marital property is fairly simple. If you got it before the marriage or received it as a unilateral transfer (gifts, inheritances, etc.) then it is separate property. If you acquired it during the marriage in any way other than a unilateral transfer, it is marital property. In practice, things aren’t nearly so simple.

Making Separate Property Marital Assets

The most complicated part of separate vs. marital assets is also the most basic: Most married couples behave as a single household. They share significant assets, spend money from the same bank accounts and otherwise hold property in common. This leads to what the law knows as “commingling.”

Commingling occurs when married couples share separate assets, or when separate assets are used by both spouses in some way. This causes those assets to be reclassified as marital assets. This can happen in several different ways depending on the nature of the asset. Following are some common examples.

Merging Fungible Assets in a Single Account

If you use a single account to hold marital and separate assets, those assets typically are all reclassified as marital property. Most often this applies to savings accounts and checking accounts. Say that you have a bank account with money that earned before the marriage. You get married but continue to have your paychecks deposited into this account.

Regardless of whose name is on it, in most states, the entire account will now be considered marital property. Since you have combined marital property (money earned during the marriage) with separate property (money earned before the marriage), all of that money becomes a marital asset.

This is true for most types of fungible assets. For example, the same can be true if you merge an investment portfolio with your spouse’s. Those stocks might have belonged to you before the wedding, but if you merge investments with your spouse the entire portfolio can become part of the marriage.

Using Fungible Assets for the Household

Even if you don’t contribute marital assets to an account, it can become a marital asset if you regularly use it for the household. This is a relatively uncommon situation. In most cases, if you withdraw money from an account it means you have also contributed money to it (which would also trigger commingling).

Say you receive a large inheritance. You deposit all this money into a dedicated, separate account. At this point, many states would consider this money to be a separate asset since you received it as a unilateral transfer. Now say that you begin using this money to pay the mortgage on a home you and your spouse bought together. The entire account may become a marital asset. Since you used this money to pay shared bills, your state may decide that you shared the entire account.

Acquiring Assets During the ZMarriage

Assets you acquire during a marriage are considered marital assets. So far, so normal. This can trigger commingling, however, if you use separate assets to buy this shared property. For example, say you have an account with money from before your marriage. You’ve kept this account sufficiently isolated so that it is a separate asset.

Now say that you and your spouse buy a house using this money. Regardless of whose name is on the deed, the house counts as a marital asset because you bought it during the marriage. This effectively has converted your money into a marital asset, because you used it to buy something shared.

Appreciating assets during the marriage

When it comes to non-fungible assets such as real estate, simply sharing it with your spouse does not necessarily turn the property into a marital asset. For example, say that you own your own home and then get married. Your spouse moves in with you. In many states, simply letting your spouse live in the house with you does not make the house a shared asset. You owned it before the marriage, so it might remain separate property. Check this carefully though, because the laws will differ from place to place.

The next question, however, is appreciation. What happens if the value of that home goes up throughout the marriage? For example, say that over the years that you are married the value of the house increases by $200,000. You get divorced and after the divorce, you sell the house. Do you owe your spouse any money?

It depends. Generally speaking, market-based appreciation is not considered a marital asset. If the value of your house increases simply because the housing market has gotten hot, then that additional money most likely belongs to you entirely. The same would be true, say, of the equities that you owned going into the marriage. If it simply accrued value because the market did well, you likely owe your spouse nothing.

However, if a separate asset has appreciated because your spouse contributed value in some way then that appreciation will often be considered a marital asset. For example, say that the value of your home increased because you and your spouse renovated the kitchen and added a deck. In some states, you will have to split the $200,000 appreciation with your spouse. This often leads to the difficulty of figuring out how much the house is appreciated specifically during the marriage. In other states, because you both spent money and effort on the house, it will be considered commingled.

Every state can be highly idiosyncratic when it comes to defining how and when separate assets are commingled into marital assets. However, as a general rule, if you contribute to a separate asset during the marriage or use fungible assets for the benefit of the household, there is a significant chance that a court will consider those assets shared marital property. Keep this in mind and do your research before making any plans.

Bottom Line

Separate assets include property owned before marriage or received individually during marriage. Marital assets are acquired, earned or purchased during marriage. Separate assets may become marital if mixed with joint property or used for household benefit. Rules vary by situation and jurisdiction so it may be important to consult a legal professional before deciding.

Tips on Estate Planning

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