Solid‐state batteries (SSBs) with a Li7La3Zr2O12 (LLZO) garnet electrolyte are attracting much attention as robust and safe alternative to conventional lithium‐ion batteries. Technical challenges in the practical implementation of garnet SSBs are related to the need for high‐temperature sintering, which often leads to undesirable chemical reactions with the cathode material. While these reactions are well understood for composite cathodes, very little is known about similar processes between cathode and separator during battery fabrication. This work focuses on understanding the processes between the composite LiCoO2‐LLZO cathode and the LLZO separator and how they affect the battery performance. The extensive diffusion of Co‐ions within LLZO, which leads to the often‐observed LLZO darkening, is shown to have a significant impact on ionic conductivity, electronic conductivity, and dendrite stability of the separator. Experimental data coupled with large‐scale molecular dynamics simulations uncover the diffusion mechanism for Co‐ions and identify secondary phases that form during these interactions. In addition to extensive Co‐ion diffusion within the grains, a non‐uniform segregation of Co‐ions at grain boundaries is found leading to the formation of three distinct Co‐containing phases. This work offers a general approach to studying the fundamental ion diffusion processes that occur during the fabrication of oxide SSBs.