California is a community property state, a distinction that may have significant estate planning consequences for couples who live here. When dealing with specifics assets, the first thing that must be determined is the classification of the property, whether it is community or separate. According to California Family Code § 760, community property is everything that the spouses bought or received during their marriage while living in California. It does not, however, include an inheritance or a gift made only to one spouse so long as the property is not co mingled. Separate property is everything that was purchased or received by either spouse prior to the marriage. It also includes inheritances or gifts made to only one spouse.
Once a classification of property has been made, the next question is how that classification will affect a couple’s estate-planning goals. Families are now more blended than ever. Individuals divorce and get re-married all the time. When one spouse is planning for their passing, they may want to leave certain items to a child from a previous marriage. Before a couple can finalize a plan distributing their estate, each spouse will have to consider the state’s law on property characterization due to the limits the law imposes on the transfer of marital property.
Although the distinction between community and separate property may be easy to understand, several decisions from California courts have muddied the legal waters. These decisions indicated that there are some ways in which separate property can become community property.
- Commingling. One way that separate property can become community property is through commingling. This occurs when separate property becomes so entangled with community property that it is difficult to separate the two. The most common example of this is a separate bank account that then becomes a community bank account. Most of the time it is difficult to tell what funds existed before the marriage and what has been added to the account since the marriage. For this reason, most California courts would say that the accounts have been commingled and therefore the entire account would be classified as community property.
- Payments to maintain separate property. Many times, spouses come to the marriage with separate property, like a residence. If, after the marriage, the other spouse contributes to the mortgage or upkeep of the house, most California courts will hold that a portion of the house has been transformed into community property.
- Income from separate property businesses. In most cases, income generated from separate property is also classified as separate property. However, in some cases, that income can be transmuted into community property if, after the parties are married, the spouse continues to work with that income-generating asset full time during the marriage. For example, if one spouse owns a restaurant prior to the marriage, then marries, and still works full-time in the restaurant, any income that the restaurant generates may be determined to be community property.
Couples can, by agreement, circumvent the community property laws. This is usually done by prenuptial agreement. As long as the agreement is valid, family courts will honor the parties’ decision. If you have questions about the impact of California property laws on your estate, you should discuss your case with a California estate-planning attorney. Estate-planning attorney John Palley at Meissner, Joseph & Palley, Inc. is a Certified Specialist in Estate Planning, Trust, and Probate Law. His office will be happy to assist you with any of your estate planning needs. Call today at 1-888-920-5983.