Estate planning is important for everyone, no matter their age or marital status. However, California is one of nine states that has special legal provisions just for married couples. In California, the courts consider many of the assets owned, held, or managed by married couples to be community property.
California’s 3 Property Types
To understand California’s community property law and its implications for estate planning, it’s important to know how the state defines three types of property:
This is property owned by one person prior to marriage or received as a gift or inheritance during marriage. Separate property is individually held—it could be a car, a house, or even a stock portfolio. Even after a marriage, an individual spouse can do with their separate property as they please. If they divorce, move away, or die, the surviving partner cannot legally claim an interest, or ownership stake, in a separate property.
This is all properties, income, and assets acquired during marriage. Community properties are jointly owned assets, and each spouse has an equitable, 50-50 interest in any community property, be it a home or bank account.
This is property and/or assets purchased by either spouse in a different state and would have been considered community property had they been acquired in California. An asset may be considered a quasi-community property if divorce or probate proceedings are initiated in California.
Defining Community Property
Community property law dictates that any properties or assets acquired by a spouse before marriage will remain the exclusive, separate property of that spouse. But any properties or assets acquired during marriage are jointly owned and are considered community property.
Many different forms of assets can be included or construed as community property, including:
Community Property and Estate Planning
Since community property law dictates an equal partition of assets, it can have major implications for estate planning.
When any married California resident dies, the law believes their spouse holds an interest in at least 50% of the decedent’s assets. While this can provide estate planning advantages, community property demands extra consideration.
The “Double Step-Up” Advantage
In a community property state such as California, there is something called a “step-up in basis.” It’s considered a loophole for those inheriting assets that carry large capital gains. With a step-up in basis, the original cost basis of the asset is removed, and it’s replaced by the current market value. Thus, the capital gain is reduced for whoever is inheriting the asset. This change occurs when the asset is transferred—usually when the decedent dies—or in the case of a married couple, when the first spouse dies.
There is also what’s known as the “double step-up in basis” that occurs when the surviving or second spouse dies. The asset that is inherited receives a second “step up.” Thus, in a state with community property laws, the inherited asset gets stepped up twice—once for the surviving spouse, and then again for the person who becomes the final beneficiary of the asset. The double step-up can greatly reduce the amount the final beneficiary must pay in capital gains.
Why You Need to Talk About Community Property With Your Spouse
No matter how well you and your partner get along, you may still have different ideas about what should count as community property and what should be considered separate property.
You may want to discuss:
- Which assets should be considered separate, and which should be considered community?
- If one or both spouses have children from a prior marriage, would either spouse want to gift any assets to those children after the first spouse dies?
- Similarly, what would happen if one spouse passed on the family home to their step-children, and those step-children needed to sell it? Where would the surviving spouse live?
Depending on your circumstances, you may wish to recategorize some community properties as separate properties. Couples often do this if:
- Both partners have children from prior relationships and wish for their respective children to receive all or most of their individual assets
- One spouse acquired an object of unusual value or sentimental importance after value and wishes to bequeath it to someone else upon death
- One partner is paying for a home, vehicle, or other asset and wishes to retain full interest in that asset
The last example is particularly important because separate properties can sometimes become community properties. For example, one spouse may have purchased a home years before marriage. But if there is a mortgage on the property, the new spouse will acquire an ownership interest equivalent to 50% of every post-marital mortgage payment, even if they are not contributing any money themselves.
How to Take an Asset Out of Community Property
You cannot obtain any automatic exemption from community property law. However, California’s legal system understands that married couples may wish to make exceptions for certain assets.
If you wish to categorize specific community properties as separate properties, you may sign either a premarital or post-marital agreement. While such agreements need not be legally complex, they must be clear and unambiguous. Furthermore, each partner must have an attorney review their agreement, unless they insert a clause waiving their right to attorney review.
In general, it is best to have an attorney review your agreement, since any ambiguity or diversion from California state law could be grounds for a legal challenge after a spouse’s death.
Community property can present significant tax advantages, but it can also complicate relationships and inheritances. Before purchasing a home or writing a will in California, it’s important to consider whether your preferred ownership arrangement is compatible with your estate plan.
Do You Need To Speak With An Attorney About Estate Planning?
If you need to speak with an experienced estate planning lawyer please contact us online or call us directly at 800.756.5596 to first register for one of our free, informative seminars. Your attendance will qualify you for a special discount for our estate planning services should you decide to make a free appointment at the conclusion of the seminar and choose to proceed with us. We proudly serve clients throughout California with offices in Torrance, Newport Beach, Orange, Woodland Hills and Pasadena.