What exactly is separate property?

Separate property is a legal term relating to distribution of assets in connection with divorce or in the estate of a deceased person. Prior to this point, both parties to a marriage will freely manage their own property, but in connection with the dissolution of marriage, it suddenly makes a big difference whether the property is included in family assets or whether the assets can be excluded. Separate property can be agreed between the spouses, but a testator can also decide on separate property. For example in wills.

We have written a little about this below.

When is separate property important?

You may have heard talk about rules between spouses concerning separate property and family assets when entering into marriage. It may seem that these terms apply to ownership of property, but that is misleading. The terms used about ownership in marriage (whether spouses own something jointly or alone) are joint ownership or sole ownership. We will not go into further detail about this other than to specify that the latter terms relate to ownership in marriage. Separate property and family assets, however, are about how the spouses’ assets will be divided after marriage, either in the event of separation and divorce or in the event of the death of one spouse.

 

So, what exactly is separate property?

The main rule, and the standard resolution in law when two people get married, is family assets. Family assets means that what the spouses acquire during marriage will be divided equally if the marriage ends. This means that each spouse is entitled to half of the value of everything acquired by the other spouse. Family assets automatically takes effect upon conclusion of a marriage unless otherwise agreed. Separate property refers to an agreement concerning exemptions from equal division. Separate property means that what the spouses own or subsequently acquire will be kept out of division upon the dissolution of the marriage.

 

Separate property can be agreed in full or in part. The agreement of separate property may be that the property of both spouses will be fully excluded from division, or that parts of the property of one or both spouses will be excluded. An agreement of separate property between spouses, must be done through a marriage covenant. So, why is this marriage legislation relevant when you are writing a will? Because your heirs may be married/wish to get married in the future and because you, as the testator, can ensure that the inheritance is separate property.

 

How much freedom does the testator have?

Naturally, a testator cannot decide anything about the heir’s property in general, but the testator may set out conditions for the inheritance they bequeath and any later financial returns on it. Such conditions of inheritance must be included in the will.

 

If a testator has children, he/she will be restricted to disposing of their own funds due to the rules concerning the compulsory heirship of lineal descendants. Compulsory heirship refers to a statutory share of inheritance that will pass to the children of the testator. Nevertheless, the testator is entitled to decide that compulsory heirship shall become the separate property of the heir.

 

Such separate property orders from testators are highly prevalent. The typical case involves conditions on separate property set by the heir’s parents, who do not want the inheritance to be divided in the event of divorce. A separate property order cannot be changed by the recipient. The property cannot be turned into family assets through a marriage covenant or be transferred to the heir’s spouse in the event of an undivided estate, unless the testator has allowed this. Nevertheless, the testator has many options when it comes to drawing up their will, which will create the framework for the scope of separate property.

 

For example, there is nothing to prevent the separate property order to be worded in such a way that the heir has access to rescind the order should they wish to. A time-limited separate property order may also be given or a separate property order that remains in force only until the heir and their spouse have shared children. The answer to this question has to be that the testator has a relatively large degree of freedom. Nevertheless, many choose to include an absolute clause, as you can then avoid the recipient being exposed to pressure from others to make changes.

 

But why use separate property when inheritance can be divided unequally?

The main rule concerning family assets (equal division) is justified by the assets of a marriage being assumed to have been created through joint efforts. At the same time, it avoids difficult reconstructions of ownership and disagreements about who owns what. However, much of the justification for equal division falls short when it comes to inheritance. There is therefore a special rule concerning so-called unequal division which, among other things, states that assets acquired by a spouse through inheritance can be required to be kept outside of division.

 

Many believe that separate property is the same, i.e. a requirement for unequal division. It can be difficult to understand the distinction and we have listed some key differences below.

 

The right of a spouse to remain in an undivided estate after the death of the other spouse is generally reserved for spouses with family assets. Unequally divided funds are part of family assets. If the marriage is dissolved through the death of an heir, the surviving spouse will therefore be able to assume the inheritance in the undivided estate and the assets are equally divided in the event of the subsequent division of the undivided estate. In the event of a separate property order, the recipient’s spouse would only be entitled to remain in an undivided estate with the recipient’s separate property if set down in the will. If a parent is to safeguard grandchildren’s inheritance in the event that their child dies, it will therefore be necessary for such inheritance to be made into the child’s separate property.  It can also be agreed that the right to unequal division shall not apply between spouses. An order on separate property set out by a testator will trump such an agreement and prevent the inheritance from being included in the division pot, even if desired by the spouses.

 

There are also certain provisions on debt and increases in value that mean that separate property is favourable. Overall, separate property is still the recommended solution for testators who want to ensure that the recipient is best positioned for the future.

 

What are the most important aspects to consider?

The testator’s conditions for inheritance may, as shown above, have a number of consequences for the recipient. A separate property order restricts the recipient from certain dispositions relating to the inheritance and the scope of the separate property order is up to the testator. If you are writing a will and you are considering including conditions relating to separate property, carefully consider the wording of the will to ensure that you achieve what you want.

 

If an heir does not have lineal descendants, the reality of the separate property order will be more limited. The heir will then be able to bequeath their entire assets, including separate property, to the other spouse.

 

Please note that certain dispositions relating to separate property are not permitted pursuant to the rules set out in the Marriage Act. Such dispositions will not be binding, either for the spouses or their heirs. You are advised to contact a lawyer if you have any questions about how to draw up your will.

Johannes Andersen

Johannes Andersen

Dina Rojahn Berg