After attending church Council meetings or services, I am often approached and asked questions by individual members. Other than general real estate concerns, the majority of the questions are in the area of estate planning, (Wills and Trust) and how they relate to community property. Although some get the concept of what community property is, when it gets down to it, they really don’t understand how it works and its effects on their estate. What follows is a brief overview of community property, which is the rule of the land in California.
California Family Code section 760 defines community property as, “except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property”.
In other words, all property acquired during the marriage, regardless of its location, while living in California, is presumed to be community property. Additionally, all property acquired prior to marriage or during legal separation is considered the separate property of that individual spouse. Furthermore, all property acquired during marriage by an individual spouse through gift, bequest or devise is that spouse’s separate property. Upon dissolution of marriage, (divorce) all community property assets are subject to equal division between the spouses unless State law dictates otherwise.
Probably the best way to determine what is community property is by understanding what separate property is. In its simplest form, separate property is that which a spouse acquired prior to marriage. This is because the law presumes that property acquired during the marriage is community property unless the spouses can prove that there was an agreement to the contrary. This can be done by showing that the title was taken as separate property and that the trail of proceeds taken therefrom can be traced back to that separate property. This separate property can include anything purchased prior to marriage or acquired through gift or inheritance during the marriage.
In order to determine the character of any asset, one must trace the source of funds used to acquire the asset. By way of an example, a house inherited during a marriage is the separate property of the spouse because it was received as a gift. Similarly, any proceeds then derived from the sale of that house, (including an asset purchase from those proceeds) are also separate property. However, the proceeds from the sale can be altered from separate to community property at any time. The burden of proof is on the spouse claiming the property as their separate asset.
Generally speaking, separate property can become community property through either transmutation, (changing from one form to another) or the comingling of assets, (think joint bank account used to pay family expenses). California Family Code Section 852 states in part that: “A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”
Effects of Characterization:
Whether an asset is separate or community property may have many different impacts upon the death of a spouse, dissolution of marriage, and taxes.
Upon the death of a spouse, community property could end up the subject of probate without an estate plan, such as a will or trust. Generally, without an estate plan, the surviving spouse would likely end up with the deceased spouse’s share of the community assets and possibly their separate property.
If the couple should dissolve their marriage, the community assets are generally split equally between the two of them with each party receiving all of their own separate property. Since it is impractical, if not impossible to literally split assets in half, the parties will place a value on a given asset, (sometimes via an appraisal), and allocate accordingly. In other words, the parties will agree on a balance or offset between the value of the assets. As a simplified example, if the house is appraised at $500,000 and one spouse wants to retain ownership, that spouse would agree to give the other spouse $500,000 in offsets, such as the car, cash, and mutual funds. The ultimate goal is for husband and wife to receive one-half of the community property, in cash or in-kind.
Note that some assets will generally remain separate property after marriage, including but not limited to debt acquired prior to marriage. There are also some exceptions that apply to stock options, pensions, and personal injury awards. The division of a business, child support, and alimony are each entirely their own subject matter and far beyond the scope of this belief description.
Community property laws are rather complex and there is an exception to almost every rule or presumption. In addition, many presumptions change upon the dissolution of a marriage of long duration (10+ years). Never assume that an asset is either community or separate property without knowing the ins and outs of California Family Law and always consult a professional.
Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.