California has the distinction of being one of America's few community property states. Under California law, if you’re married, both you and your spouse jointly own everything that either of you acquires or earns during the marriage. However, even community property states make a distinction between marital property and assets that should logically and morally belong to one spouse alone. In California, inheritances fall into this category.
Nature of Inheritance
If you inherit before you’re married, the gift is twice protected, once because you received it before you tied the knot and again because the law treats an inheritance as your separate property. If you inherit after you're married, however, the will should preferably state that the bequest is made solely to you. If the language in the will states that the gift is to you and your family or kin, this could create a gray area. California law would allow your spouse to make a claim for it if you divorce, and the burden of proof would be on you to prove that the decedent intended the asset for you alone.
You can invalidate your separate property in California if you’re not careful. If the inheritance is clearly yours, you must manage it that way. For example, if you inherit cash and you deposit it in a bank account you hold jointly with your spouse, the money loses its immunity. In legal terms, you have commingled it with marital funds and compromised its direct passage from the decedent to you. Likewise, if you inherit real estate and you and your spouse move in and use it as your marital home, he might be able to make a claim that this turned it into community property. If you rent out the home and spend the rental proceeds on you and your spouse or invest it in a joint asset, you’ve also muddied the waters. Ideally, you should segregate the money in a separate account in your own name.
You can also lose your sole ownership of an inheritance through a legal process called transmutation but California law makes it almost impossible for you to do this unintentionally. Transmutation occurs when you make a gift of some or all of your inheritance to your spouse. For example, if you inherit $1 million and give him $500,000 of the money, but you segregate the remaining $500,000 in an asset in your sole name, your $500,000 is safe but you’ve transmuted the portion you gave him. Whether it becomes his property or community property depends on how you identify it. California law requires a written document from you, stating that you’re knowingly consenting to a change of ownership of the asset. You can state in the document whether the gift is to become community property or your spouse’s sole and separate property.
You’re not entirely at the mercy of California’s community property laws if you receive an inheritance while you're married. A postnuptial agreement can override the law. If your spouse agrees that the inheritance is yours alone, no matter what you do with it, you can both sign an agreement to that effect. In the event of a divorce, the court will usually honor it.