California Community Property and Estate Planning

California is one of only nine community property states in the U.S. This unique legal framework fundamentally affects how married couples own property, how assets are divided in divorce, and crucially—how estates are distributed after death. Understanding community property is essential for effective estate planning.

What Is Community Property?

Community property is a form of co-ownership that applies to married couples and registered domestic partners in California. Under California Family Code §§ 760-781, property is classified as either "community property" or "separate property."

The Basic Rule

Community Property: All property acquired by either spouse during the marriage while domiciled in California is presumed to be community property. Each spouse owns an undivided 50% interest.

Separate Property: Property owned before marriage, acquired by gift or inheritance, or earned after permanent separation remains separate property.

Community Property vs. Separate Property

Common Misconceptions About Community Property

How Community Property Affects Estate Planning

1. Disposition Upon Death

When a married person dies in California, their estate includes:

• 100% of their separate property
• 50% of community property

The surviving spouse automatically retains their 50% share of community property. Only the deceased spouse's 50% share passes through their will or trust.

2. The Community Property with Right of Survivorship

California law allows married couples to title community property with a "right of survivorship." This means when one spouse dies, their share automatically transfers to the surviving spouse without probate.

Advantages:

• Avoids probate for that asset
• Provides immediate access for surviving spouse
• Both spouses receive a stepped-up tax basis (explained below)

Limitations:

• Only works between spouses
• Doesn't provide for children or other heirs
• Doesn't protect assets if both spouses die simultaneously
• Doesn't avoid probate if surviving spouse later dies

3. The Double Step-Up in Tax Basis

One of the most significant advantages of community property is the "double step-up" in tax basis upon death.

Quasi-Community Property

California has a unique concept called "quasi-community property" that protects spouses who move to California from non-community property states.

Definition: Property acquired by a married couple while living in another state that would have been community property if they had lived in California.

Why it matters: For estate planning purposes, quasi-community property is treated like community property. This prevents a spouse from moving to California and then disinheriting their partner from property that would have been shared if acquired in California.

Transmutation: Changing Property Character

Spouses can change property from separate to community (or vice versa) through a process called "transmutation." However, California law requires strict formalities.

Legal Requirements for Valid Transmutation

1. Must be in writing – Oral agreements don't count (California Family Code § 852)
2. Must be signed by the spouse whose interest is adversely affected
3. Must contain express language showing intent to change the property's character

Community Property and Living Trusts

Living trusts are particularly important for married couples in community property states. Here's how they interact:

Community Property Trust vs. Separate Property Trust

Married couples can create:

• Joint Community Property Trust: Both spouses are trustors and trustees, holding community property together
• Separate Property Trusts: Each spouse maintains separate trusts for their separate property
• Combination: A joint trust for community property plus separate trusts for significant separate property

Why Community Property Should Go Into a Trust

1. Probate Avoidance: Keeps property out of court upon first and second deaths
2. Preserves Double Step-Up: Properly drafted trusts maintain the tax benefits of community property
3. Privacy: Trust administration is private; probate is public
4. Control: Specify what happens to community property after both spouses die
5. Incapacity Planning: Successor trustee can manage property if spouse becomes incapacitated

Blended Families and Community Property

Community property rules create special challenges for blended families where one or both spouses have children from previous relationships.

Commingling: The Silent Property Killer

One of the most common estate planning problems occurs when separate and community property get mixed together—called "commingling."

How Commingling Happens

• Depositing separate property inheritance into joint bank account
• Using community funds to improve separate property
• Depositing paychecks (community) into account with inheritance (separate)
• Paying mortgage on separate property with community earnings

The Tracing Problem

Once commingling occurs, the burden is on the spouse claiming separate property to "trace" the separate property funds. This requires meticulous records that most people don't maintain.

Preventing Commingling

1. Keep separate property in separate accounts titled in one spouse's name only
2. Never deposit community funds into separate property accounts
3. If you inherit money, open a new account immediately in your name alone
4. Keep detailed records of all transactions involving separate property
5. Consider a postnuptial agreement if significant separate property exists

Debt and Community Property

Community property rules also apply to debts incurred during marriage.

General Rule

Debts incurred during marriage are presumed to be community debts, meaning both spouses are liable. This includes:

• Credit card debt
• Medical bills
• Business debts (in some cases)
• Tax liabilities

Estate Planning Implications

When one spouse dies:

• Community debts must be paid from community property before distribution to heirs
• Creditors can claim against the deceased's 50% of community property
• In some cases, creditors can pursue the surviving spouse's 50% share

Community Property Agreements

Some spouses use "Community Property Agreements" to simplify estate planning. These agreements state that all property (including separate property) is community property and passes to the surviving spouse automatically.

Advantages

• Simple and inexpensive
• Avoids probate on first death
• Both spouses get full step-up in basis

Major Disadvantages

• No control over where property goes after surviving spouse dies
• Doesn't protect children from previous marriages
• Converts separate property to community property (loses separate property character)
• Less flexible than a living trust
• Doesn't address incapacity planning

Recommendation: For most couples, a properly drafted living trust provides better protection and flexibility than a community property agreement.

Practical Steps for Protecting Your Community Property Rights

1. Create an Inventory

Document all your property and classify each asset:

• What is it?
• When was it acquired?
• How was it acquired?
• What funds were used to purchase it?
• Is it community or separate property?

2. Establish a Living Trust

Work with an experienced California estate planning attorney to create a trust that:

• Clearly identifies community vs. separate property
• Preserves the double step-up in basis
• Provides for your spouse and children according to your wishes
• Includes incapacity planning

3. Maintain Separate Accounts for Separate Property

Keep inherited money and other separate property in accounts titled in your name alone. Never commingle with community funds.

4. Update Beneficiary Designations

Retirement accounts, life insurance, and other beneficiary-designated assets pass outside your trust. Ensure beneficiaries align with your overall estate plan.

5. Consider a Postnuptial Agreement

If you have significant separate property or complex family situations, a postnuptial agreement can clarify property rights and prevent disputes.

6. Review Estate Plan After Major Events

Review your estate plan when you:

• Receive an inheritance
• Buy or sell real estate
• Start a business
• Have children
• Move to or from California

Frequently Asked Questions

Does community property apply to registered domestic partners?

Yes. California law treats registered domestic partners identically to married couples for community property purposes.

What if we moved to California from another state?

Property acquired in another state is generally governed by that state's laws. However, for estate planning purposes, California treats out-of-state property that would have been community property as "quasi-community property."

Can I disinherit my spouse?

No. Your spouse has an absolute right to their 50% of community property. However, you can control disposition of your 50% share. Separate property can generally be left to anyone you choose.

What happens to community property if we divorce?

In divorce, community property is divided equally (50/50) between spouses, while each spouse keeps their separate property. Division can be physical (selling and splitting proceeds) or by allocation of different assets.

Should I keep separate property separate if I want my spouse to inherit it anyway?

Generally yes. Keeping it separate provides flexibility. You can always leave it to your spouse in your will/trust, but if it's community property, you lose the option to leave it elsewhere. Plus, maintaining separate property character can provide asset protection benefits.

How does community property affect estate taxes?

Community property affects the estate tax calculation. As of 2024, the federal estate tax exemption is $13.61 million per person ($27.22 million per married couple). Community property allows portability of the exemption between spouses, potentially doubling the tax-free amount.