What might be separate property?

Below are some categories of assets that often will qualify as separate property:

Income earned before marriage that is not commingled with marital funds.

Income earned by either spouse before marriage is clearly separate property, but those funds “may lose their character as separate property and transform into marital property if they are commingled with marital assets and treated by the parties as marital property.”^[1] Consequently, depositing premarital earnings in a joint bank account and using that account to pay marital expenses would show an intention to treat the pre-marriage income as marital property, and therefore it would lose its character as separate property and would be divisible in divorce. But whatever wasn’t deposited in that account and is still held in one spouse’s separate name would remain that spouse’s separate property.

A small amount of commingling, however, may not transform funds into marital property if the evidence shows that parties intended to keep the funds separate and the funds can be clearly traced back to their separate origins. As the Court of Appeals explained in Landry-Chan v. Poh Huat Chan:^[2] “The fact that separate funds were deposited into an account with marital money did not automatically convert the entire amount into marital property where the funds could be directly traced to non-marital sources and there was no evidence that the parties intended the funds to be marital property.”

Passive appreciation of separate property. 

In contrast to the active appreciation described above, purely passive appreciation of a separate asset (such as interest on a separate bank account or market gains on a separate stock portfolio that is not actively managed) will usually be considered separate property.^[3]

Inheritance or gift received during marriage.

An inheritance or gift received by one spouse during the marriage is generally considered separate property (unless commingled and treated as marital, as discussed above).^[4]

Personal injury proceeds to compensate for pain and suffering.

The Michigan Court of Appeals has recognized that personal injury lawsuit proceeds are separate property if they are meant to compensate a person for their own pain and suffering. By contrast, when lawsuit proceeds (or for that matter, workers compensation benefits) are meant to compensate a person for lost wages during the marriage, those funds are marital, just as the wages would have been.^[5]

Next week, we’ll discuss how one spouse’s separate property might be “invaded” in divorce.

^{[1] See Cunningham, 289 Mich. App. at 206.
[2] No. 331977, 2017 WL 1418052, at *21 (Mich. Ct. App. Apr. 20, 2017); see also Powers v. Powers, No. 301868, 2012 WL 2019081, at *3 (Mich. Ct. App. June 5, 2012) (“… in light of the testimony suggesting that the parties always understood that they were inclined to hold their respective assets as separate property, the court did not clearly err in concluding that that intention carried over to the condominium.”)
[3] See Reeves, 226 Mich. App. at 497.
[4] Cunningham, 289 Mich. App. at 201.
[5] Id.}