Separate Property Trusts

Protect the gifts and inheritances your children receive from possible future divorce.

One of the most common questions we hear from parents and clients is: “How can I protect a gift or inheritance from me to my child in the event that they subsequently divorce? Do they need a prenup?”

California is one of nine community property states. This means that, with a few specific exceptions, there is a legal presumption that all property acquired through the fruits of a spouse’s labor during marriage is community property and subject to equal division upon divorce.

Conversely, anything acquired by gift or inheritance during a marriage is that spouse’s sole and separate property.

In addition, anything acquired by gift or inheritance before the marriage is that spouse’s sole and separate property.

For individuals in California who receive a gift or inheritance, a primary concern is ensuring that these assets, legally defined as separate property, remain shielded from community property claims in the event of a marital dissolution. 

While gifts, inheritances, and premarital assets are generally considered separate property, that protection can be lost far more easily than most people expect. The issue is not the law itself, but how everyday financial decisions can blur the line between separate and community property over time. Inherited or premarital assets are often unintentionally exposed to division simply because they are comingled with marital finances.

A meticulously drafted and properly administered Separate Property Trust (SPT) is an especially effective tool to address this issue in estate planning.

Characterization of Gift or Inheritance and Major Risks that Can Change its Character

Under California Family Code section 770, a gift or an inheritance—whether received before or during marriage—is the recipient’s separate property. Although California law is clear regarding the characterization of a gift or inheritance, it immediately faces the powerful presumption that property acquired during marriage is community property. This can arise if a gift or an inheritance becomes commingled or otherwise loses its separate character.

Commingling assets is the most common threat—this occurs when separate property funds are combined with community funds into a single account. For example, if your child receives a gift or an inheritance of $100,000, but places those funds into a joint account with their spouse, your child’s spouse most likely just gained a one-half ownership interest, subject to equal division upon divorce. The burden falls on your child to “overcome the presumption” by proving the separate character of the asset. Once assets are comingled, it can be difficult and costly to untangle what remains separate. In many cases, a portion of what began as separate property may be treated as community property in a divorce.

Another significant threat is transmutation, which occurs when spouses agree to change or otherwise “transmute” the character of certain property from separate property to community property or vice versa. (Cal. Fam. Code § 850.) For example, spouses can agree to convert separate property into community property. However, California imposes a strict requirement for transmutations. Since 1985, a transmutation "is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected." (Cal. Fam. Code § 852(a)). In Valli v. Valli, the California Supreme Court held that a life insurance policy purchased with community funds but titled in the wife's name alone remained community property because there was no written "express declaration" sufficient to transmute the husband's community interest. (58 Cal. 4th 1396, 1406 (2014).) Although the writing requirement helps prevent accidental transmutations, actions such as adding a spouse’s name to the title of inherited property can, if accompanied by the required express language, effect a valid change in character.

A third, often overlooked risk arises when inherited funds are used to start or invest in a business that your child actively manages during marriage, used as a down payment for a home titled in both names, or are used to improve community property. Similar risks arise when inherited or premarital assets are used to purchase or improve property with a spouse, when a spouse’s name is added to title, or when separate funds are invested in a business that one spouse actively manages during marriage. Even if the original asset was separate, its growth or appreciation may not be.

These rules also apply to partners in registered domestic partnerships.

The Separate Property Trust (SPT) as a Protective Shield

A properly drafted Separate Property Trust (SPT) creates a clear legal firewall around inherited and premarital assets. It keeps those assets separate from marital finances, helps prevent accidental commingling, and preserves their separate character over time. When structured correctly, the SPT can protect not only the original asset, but also its income, appreciation, and long-term growth.

A Separate Property Trust is not about restricting access or preventing generosity. The beneficiary can still use trust assets during their lifetime and may choose to support a spouse or family. The difference is that those decisions remain intentional and controlled, rather than dictated by default community property rules.

The Separate Property Trust can be revocable (for flexibility) or irrevocable (for stronger protection against divorce claims or creditors). Precise drafting is essential to ensure the Trust operates as intended both during life and after the death of the spouse establishing the Separate Property Trust. These Trusts are also generally established as Grantor Trusts, where the income of the Trust is taxed to the creator as an individual. The Trust’s structure and terms should be carefully drafted depending on the particular needs and concerns of the client.

A properly structured Separate Property Trust allows the beneficiary (as settlor and trustee) to use funds or income for marital purposes, such as joint expenses or gifts to the spouse. However, without clear guidance, even well-intentioned actions can undermine the protections of a Separate Property Trust, such as direct disbursements for ordinary marital expenses or deposits into joint accounts. These actions may constitute commingling and unintentionally effect a transmutation of character. To minimize this risk, distribute funds first to a separate account and maintain detailed records.

For example: Emilia is about to get married to Zach. She owns an investment portfolio. Each of her parents make annual gifts to her of $19,000, and she will inherit half of their $5 million estate when they die. Emilia creates a Separate Property Trust (SPT) prior to the marriage, naming herself as Trustor, Trustee, and beneficiary. It is a revocable trust. She is entitled to all of the net income at least annually, so the Taxpayer Identification Number of the trust is her Social Security Number. She transfers her investment account into her SPT, and all future gifts from her parents will go directly into this account. Her parents amend their trust to provide that upon their deaths, Emilia’s half of their estate will go directly into her SPT. Upon marriage, Emilia will not deposit any of her paychecks into this SPT. In the event of divorce with Zach, he will not be entitled to any portion of the SPT.

When Should a Separate Property Trust (SPT) be Created?

A Separate Property Trust should be created as soon as the need is known. Many of our clients create one for each of their children as soon as the child is legally able to create one. It is especially valuable for individuals entering a marriage with significant assets, as it establishes clear separation from the outset and helps avoid later disputes over ownership. For many families, creating a Separate Property Trust has also become a thoughtful and practical wedding gift for a child. Financial and estate planning discussions are often overlooked amid wedding excitement, but early action prevents future disputes. Importantly, you should not wait until a gift or an inheritance is actually received. Having the Separate Property Trust and trust account already in place makes the process far simpler and ensures that assets are protected immediately upon transfer, before any commingling can occur.

Conclusion

While a Separate Property Trust provides robust protection for a gift or an inheritance in California, it requires careful drafting, administration, and ongoing caution to avoid commingling.

If you or a loved one are contemplating marriage, already married, or anticipate receiving a gift or an inheritance, we urge you to schedule an appointment with one of our attorneys to discuss whether a Separate Property Trust is appropriate for your situation. Early planning is the most effective way to safeguard separate property assets.

This article was written by Attorneys, Mark S. Drobny & Isabel T. Strait.

Very truly yours,

DROBNY ROSENTHAL LAW OFFICES, PC

 /s/

MARK S. DROBNY, Founder and CEO

ANNE E. ROSENTHAL, Managing Shareholder

This testimonial or endorsement does not constitute a guarantee, warranty or prediction regarding the outcome of your legal matter.