Before a married couple can make a determination as to distributing their estate via a trust or will, each spouse should consider California’s law on property characterization. These laws impose limitations on the transfer of marital property.
This area of law is principally governed by the legal term “community property.”
Even though community property is a term synonymous with divorce, community property also plays a significant role in estate planning as well. The following are some common questions that pertain to community property.
1. What is community property?
California law defines community property as all property acquired by a California domiciliary during marriage that is not specified by statute to be separate property. Fam C §760.
2. What is separate property?
California law defines separate property as all property owned before marriage and all property acquired during marriage that is acquired by gift or inheritance. Fam C §§770(a)(1)-(2).
3. Can I alter the characterization of property during marriage?
Yes, a spouse is free to change the characterization of property during marriage from community to separate, separate to community or separate of one spouse to separate of another. Fam C § 850. The term used for this process is “transmutation.” 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." Fam C § 852. The written instrument aspect only applies to transmutations effected after 1984. Fam C § 852(e).
For example, Jack purchased a home in Carmel, CA as a single man in 1982. Then in 1983, Jack married Jill. Later in 1983, Jack orally declared to Jill that the Carmel house was now their community property. Had Jack tried to orally transmute the property in 1989, this would not suffice. Instead, Jack could use a deed from himself to Jill and himself to transmute the property from his separate to community property. Estate of MacDonald (1990) 51 C3d 262.
4. How does a prenuptial agreement affect community property law?
A prenuptial agreement can have a sweeping effect on the characterization of marital property. For instance, in 1987, Barry Bonds famously entered into a prenuptial agreement with his first wife Sun Bonds where each party waived any interest in the earnings and acquisitions of the other party during marriage. The enforceability of this prenuptial agreement was ultimately scrutinized by the California Supreme Court which upheld it, sparking a change in California’s prenuptial agreement laws by the California legislature. Marriage of Bonds (2000) 24 C4th 1, 99 CR2d 252.
5. Does community property encompass real and personal property?
Yes, as defined in the Family Code, “property" includes both real and personal property. Fam C §113. Thus community property law applies to the martial home just as much as it does to a diamond ring.
6. I purchased a home before marriage, is that community property?
A home purchased before marriage will probably be characterized as both community and separate property. The home is considered partially community property because it was purchased prior to marriage. Conversely, the property is partially separate if the mortgage payments were made via community earnings such as employment wages. Marriage of Moore (1980) 28 C3d 366.
7. I owned a business prior to marriage and continue to operate it, is that community property?
A business brought into the marriage and continued thereafter, will generally be considered both community and separate property. The reason for this is because the business was brought into the marriage, separate property, but marital effort will likely be expended on it, community property. Just as with a home purchased before marriage, there is an arithmetic formula for determining the community and separate property interest in the business. Van Camp v Van Camp (1921) 53 CA 17, 199 P 885; Pereira v Pereira (1909) 156 C 1, 103 P 488.
8. Is community property the norm in the United States?
No, community property is the atypical marital property law in the United States. The community property jurisdictions are California, Arizona, Louisiana, Nevada, New Mexico, Texas, Washington, Idaho and Wisconsin. Alaska has an optional community property system. Community property is based off of Spanish law in case you are trying out for Jeopardy.
9. What are some examples of community and separate property then?
Jack and Jill were married in Solvang, California in October 1990. Jack was employed by the County of San Luis Obispo as a civil engineer. Jack’s paycheck would be considered community property. Jill inherited a sewing business from her Aunt Betsy in 1991 and took over operations immediately thereafter. The sewing business would be considered Jill’s separate property, although the profits earned from the business would be considered community property because Jill had actively participated in the business. In 1995, Jack inherited Exxon Mobil stock from his late father. The stock and the dividends from the stock would be considered separate property.
Prior to the marriage, Jack purchased a home which the couple now lived in. The couple used their salaries to make the mortgage payments. The house would be considered a mixture of community and separate property.
10. How does community and separate property relate to estate planning?
Generally speaking, each spouse may give away up to 50% of the couple’s community property, 100% of their separate property and 0% of the other spouse’s separate property. For example, assume that Jack and Jill sole assets were a $1M home purchased after marriage, $200,000 in AT&T stock which Jack inherited and $300,000 in cash savings which Jill received as a gift. Jill could include in her trust or will, half of the home, the entire savings account and none of Jack’s stock.
At first blush, the relationship between community property and estate planning is critically important because a person cannot give away something which they do not own. However, most couples usually leave their entire estate to the surviving spouse and then to their children. Thus, this blunts the importance of understanding the nuances of community property law. The cases in which community property plays a large role in estate planning involves blended families. Since a blended family might have children from multiple marriages, it is unlikely that a spouse would want to leave anything to a non-biological child. Consequently, the spouses would need to ascertain each asset’s community or separate property status in order to properly distribute their estate.
