July 17, 2009

Community property

Most mature people have heard the term "community property" thrown around as it invariably comes up in wills, trusts, divorce, bankruptcy, debt settlement, pre-nuptial and post-nuptial agreements. In most basic terms, community property is the area of law that governs the ownership interest of marital property in California. Of note, other states that follow community property law include Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Simply stated, every item acquired during marriage through marital labor by a husband and wife or domestic partnership is split evenly between spouses, 50% is owned by one spouse and 50% is owned by the other spouse. Family Code Section 760. For example, the wages of one spouse earned during marriage, the house that is purchased by both spouses and the car purchased after the wedding are all examples in which the asset are considered "community property."

Conversely, property acquired before marriage and property acquired during marriage that is not the result of marital effort is considered separate property. Family Code Section 770. For example, the Malibu dream house your spouse purchased before marriage, your inheritance from your Aunt and a gift from your golf buddy are all considered "separate property." Any of these aforementioned items is owned exclusively by the acquiring spouse subject to exception.

The reason for community and separate property's relevancy in estate planning is because each spouse can only give away their share of the community property, 50%, but all of their separate property, 100%. For example, one spouse may not give away the entire marital home to whomever if the other spouses opposes. Thus, that spouse could only give away half the house, 50%, to whomever. However, because separate property is exclusively owned by one spouse, that spouse may give away that entire item regardless of the objections of other spouse. For example, a spouse who received a bag of golf clubs as a gift from a friend, could freely give away those golf clubs even if their spouse objected.

As mentioned previously, there are exceptions to the rules of community and separate property. For example, couples are free to change the ownership characterization of community and separate property. Family Code Section 852. This process is known as transmutation. For example, if the spouse who acquired those golf clubs as a gift made an express declaration in writing that the golf clubs were now community property, the golf clubs would then become community property. Furthermore, property can be transmuted from community to separate, separate to community or separate to separate. Although there are special rules for transmuting property. See Family Code Section 852.