Community Property in California
What is community property? Married couples and domestic partners are subject to community property laws. Community property includes all assets acquired by spouses during marriage while domiciled in California, except for inheritances and gifts made to only one spouse. (Family Code section 760.)
What is separate property? Assets acquired before marriage are separate property. Assets acquired through inheritances or gifts to only one spouse are separate property. (Family Code section 770.)
Why does community property affect estate planning? Spouses may want to give certain assets to their children from a previous marriage, for example, or to someone who is not a member of the immediate family. A will or trust might say, for example, "I give my community property to my spouse, and I give my separate property to my children who were born during my first marriage." Community property and separate property can also be issues when someone dies without a will. Also, if there is no will, community property that is given to a spouse can avoid probate if a spousal property petition is used.
Estate Planning complications due to community property: Although the definitions of community property and separate property may seem clear, court decisions have changed community property statutory law. The courts tend to favor community property over separate property, and there are several ways that separate property can be determined to be all or part community property.
1. Commingling. If separate property is mixed with similar community property, it may not be possible to identify which is which many years later. An example would be bringing a separate property bank account into a marriage, and then depositing the funds into a community bank account. However, tracing of assets is often used to substantiate separate property claims.
2. Community payments to improve or maintain separate property. If a spouse brings a separate property house into a marriage, and then uses his or her monthly salary to pay the mortgage, the courts will determine that part of the house has become community property. The percentage of the community interest will depend on the number of mortgage payments, and how much the value of the house changed during that period. Likewise, using community assets to pay property taxes, insurance, and repairs can also give the community a claim to part of the house.
Separate property businesses. Generally, income from a separate property asset is separate property. However, if a spouse brings a business into a marriage and then works full time at the business, the courts can determine that the income from the business is community property. For example, a spouse owns a restaurant before marriage, gets married, and continues to work at the restaurant 12 hours a day. The income from the restaurant will most likely be considered community property.
How can couples avoid the statutes and court decisions and make their own decisions about community property? State law provides that couples can alter the law concerning community property by a written property agreement (Family Code section 1500). Family Code section 1615 also requires that the party against whom the agreement is being enforced must have had independent legal counsel when the agreement was prepared and signed. In other words, both spouses or domestic partners should hire their own lawyer when preparing a community property agreement or pre-nuptial agreement.
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