What Is A Community Property State?

There are currently only nine states which observe community property laws (Alaska is the tenth as an opt-in state for those who choose to go under community property laws). Those states are Arizona, California, Idaho, Nevada, New Mexico, Texas, Louisiana, Wisconsin or Washington. Despite the fact there are so few community property states, at least 25 percent of the U.S. population live in these states. Community property laws can touch everything from personal property ownership to divorce, debt and inheritance.

Community property encompasses everything two spouses own together, including money earned (by either spouse), any property acquired during the marriage, and any debts incurred during the marriage. This means that regardless of which spouse spends the money, makes the money or incurs the debt, the spouses own everything equally. Property owned by one spouse prior to the marriage, property obtained by a spouse following a legal separation, or property received as a gift or inheritance from a third party are considered separate property so long as the property remains separate from community property.

As an example, if your Aunt Ginger left you $50,000 during your marriage and you place that money in a separate account, without your spouse’s name on the account, then it will remain your sole and separate property. If, however, you place that money in your joint account, with your spouse, it becomes marital property, subject to community property laws. Pre-marriage debts remain separate—as an example, one spouse is not responsible for the other’s student loan debts which were incurred prior to the marriage. If one spouse incurs student loans during the marriage, however, those debts are considered community property debts.

During a divorce in the state of California, debts and assets are split 50/50 regardless of who made the majority of the money—or spent the majority of the money. Even retirement plans fall under community property law, meaning a soon-to-be ex is entitled to half of the other’s retirement pension—but only half of the amount placed in the pension after the marriage. Community property laws also prevent one spouse from disinheriting the other or giving away marital property which by law belongs to the surviving spouse. Since the community property laws of California can be complex, it is especially important that you discuss your issues with a knowledgeable California community property lawyer.

How Does Community Property Work in California?

Although California has been a community property state since 1850, there are still many misconceptions regarding community property issues. The basic tenets of California community property are as follows:

  • Any property acquired during a marriage is considered community property—wages, benefits, even a lottery windfall.
  • Community property laws in California make both spouses liable for the debts incurred by either spouse during the marriage—but not those debts incurred prior to the marriage.
  • Although community property laws are the default in the state of California, a couple can enter into a prenuptial or post-nuptial agreement which places only certain property under the community property umbrella.
  • When a marriage ends in death, the spouse who did not incur a debt has no liability for that debt—that is, the community property may be liable, but the liability does not extend to property acquired after the death.

What Happens When One Spouse Dies in a Community Property State?

When a spouse dies in a community property state, separate property may be conveyed through a will or trust in any manner the deceased chose. However, a spouse may transfer only one-half of the marriage’s community property by will, with the surviving spouse still owning the other half. If there is no will, the deceased spouse’s half of the community property passes entirely to the surviving spouse if there are no surviving children, grandchildren or immediate family members.

If there is a single surviving child, half of the deceased’s half of the marital property goes to the surviving spouse and half to the child, or, in the case of multiple surviving children, one-third to the surviving spouse and two-thirds distributed equally between the children. As you might imagine, these rules can become complicated, thus having an experienced California community property lawyer by your side can make the process significantly easier. 

Tax Benefits of Community Property Over Joint Tenancy

Many married couples believe holding property in joint tenancy is the most strategic plan, however, it could be a good idea to have a California estate planning attorney take another look at how your assets are currently held. Joint tenancy creates a right of survivorship yet fails to provide the same beneficial tax treatment community property interests receive.

This means the surviving spouse would not receive the full “step up” in basis for income tax purposes. The tax basis for real property is the fair market value of the property on the date of the one spouse’s death, both federally and in the state of California. Property held in joint tenancy means the surviving spouse already owns half of the property so will only receive a step-up in basis on the other half.

Real property held under community property laws with the right of survivorship also allows the surviving spouse to inherit the deceased spouse’s half of the property, but from a tax point of view, the surviving spouse gets the full step up in basis, and should he or she decide to sell, capital gains taxes are minimized. When the surviving spouse dies, the property receives the step-up basis again, providing heirs with the same beneficial tax treatment.

Can a Spouse Leave Marital Assets to Someone Other Than His or Her Spouse?

Under California community property laws, all property acquired by either spouse during the marriage is presumed to be community property. This is true whether employment income, property purchased with employment income or any separate property which has been given to the community property or has been comingled with community property. Separate property is property acquired prior to the marriage or acquired through inheritance or a gift which has not been given to the community property or comingled with community property. Separate property can also be covered by an express agreement between the spouses.

When a spouse dies, he or she may specify in a will that someone other than the surviving spouse will inherit his or her half of the community property but cannot distribute the other spouse’s share of the community property. The deceased spouse can, however, dispose of their sole and separate property in any manner they choose. This means under California community property laws, you could never give away your surviving spouse’s half-interest in all marital assets. Having an estate planning attorney help you with California community property laws can give you peace of mind during a difficult time.

How WealthPLAN, PC, PC Can Help with All Your Estate Planning Needs

If you are in the San Jose, Santa Clara, Alameda, Palo Alto, Contra Costa or San Ramon, California areas, a California community property lawyer from WealthPLAN, PC can help you through this difficult time in your life. Our firm of highly experienced estate planning attorneys offer support, understanding and education during times of frustration and confusion. Those who call our office will always talk to a real person—never an automated system. We work hard to communicate with each client in a way that works best for that client and fully addresses individual needs. We stand against mediocre work produced by less-qualified firms or online services and are committed to providing exceptional estate planning services for our clients. Contact WealthPLAN, PC today for all your estate planning needs. Call 408-918-9030