Legal column: Unexpected windfalls, what to do when
By Teresa J. Rhyne, Esq.
– Won the lottery lately? Inherited cash or real estate? Maybe got a big bonus at work, or finally sold that screenplay you’ve been working on for years? Congratulations! Take a moment to revel in that joyous feeling. Then see your lawyer. Unexpected windfalls are great, but you will want to carefully consider some legal issues.
Separate or community property
If you are married, reside in California, and do not have a separate property agreement (pre or post-nuptial), you’ll need to determine whether your windfall is your separate property or community property that you’ll share with your spouse.
If you bought a lottery ticket with community property funds, the lottery winnings are also community property. Your bonus at work is also community property since it stems from your personal efforts. Likewise, the big advance you got for your screenplay or novel is also community property earnings (again, assuming you do not have a separate property agreement).
Before you rush out and spend it all or put it in a new bank account in just your name, know that your spouse has a claim to half of it.
On the other hand, an inheritance is the separate property of the party who inherits. So, if you won the ancestor lottery and have inherited cash, real property, or anything else, that’s your separate property, and you may want to take steps to ensure it remains your separate property.
How to take title to your windfall assets
You’ll want to take some time to understand what you’ve won or earned or are being gifted. If it’s real property, you’ll need to carefully consider whether you want to take title as community property with right of survivorship, tenants in common, joint tenancy, sole and separate property, or as an unmarried person (if applicable; you can’t just pretend). Each of these forms of title come with distinct tax consequences—both income and property taxes, and possibly estate taxes—which can vary greatly, depending on the circumstances.
If the windfall you’re receiving is your separate property, and you wish to maintain it as separate property, be sure to title it as such, including putting the funds in a separate bank account. While California has specific laws regarding the transmutation of separate property into community property (and vice versa), as a practical matter a joint account will mean your spouse can spend the money, and it may not be there for you to assert your separate property rights when needed. This is often an important issue for couples who each have children from a prior relationship. If you want your child to inherit what you received from your parents, you’ll need to keep it separate.
Update your estate plan
If you have a trust in place, you’ll want to make sure your windfall asset is titled in the name of the trust—whether that’s real property or bank or investment accounts. You can still title the asset in the name of the trust and maintain its status as separate property but update your trust to reflect the asset’s status as separate property. In fact, you should take a look at your estate planning documents anyway.
A significant windfall can mean that the estate plan you put in place is no longer adequate. You may not have done any tax planning in your plan prior to the windfall, but now your estate is larger and tax planning may be necessary. You may also have left gifts of a certain dollar amount or percentage that no longer make sense given your increased net worth.
And, of course, if you don’t have an estate plan in place, your windfall should be just the push you need to get that taken care of. At a minimum, you’ll want a will, a power of attorney, and a health care directive. If your windfall means you now have real estate or assets with a gross value of more than $184,500, you should consider a living trust so as to avoid probate (a time and money-consuming process).
You know the saying, “More Money, More Problems.” But an unexpected windfall of assets is a nice problem to have. Just be sure you handle the “problem” sooner rather than later. And again, congratulations – especially on that screenplay.
Note: This is not legal advice to you individually, and you should rely on your own family law and estate planning attorneys to advise you.
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.” You can reach her at Teresa@trlawgroup.net.