Community Property After Death

What a married person needs to know to plan their estate

If you are married, a basic understanding of California’s community property laws is essential to intelligently planning your estate.  While most Californians have some knowledge of community, common misunderstandings lead many to bad choices.  Let me walk you through the basics.

On the day you are married, everything is crystal clear because everything you bring into the marriage is your separate property.  You can do whatever you want you’re your separate property including giving it away by will, trust, beneficiary designation, or property title.

When a newly married person receives their next pay check, things can become less clear because the fruit of your labor while married is community property.  Regardless where you deposit your paycheck, your spouse has a community property interest in it.  Unlike your separate property, the most you can give away without your spouse’s consent is your half interest in the community property. On the flip side, you have identical rights to your spouse’s paycheck.

One common misunderstanding is that putting your pay check in your personal account makes it your property.  It doesn’t.  Many people think that buying a car or other titled object in your name property makes it yours.  It doesn’t. Your labor is a community asset and the fruit of your labor is community property from the day you are married until the day you legally separate - regardless whose name is on the bank account or pink slip.  When you buy something with the money you earned while married, your spouse has a community property interest in whatever you bought. If you buy life insurance with your wages, your spouse is entitled to half the proceeds regardless who you name as the beneficiary.  In a published court case, a newly separated spouse who bought a winning lottery had to give his estranged wife half the winnings because he bought the lottery ticket with money he had earned before they legally separated.

What happens when you deposit your earnings in an account that you brought into the marriage?  Initially the account is your separate property. Immediately after you deposit your first martial pay check, you could clearly trace that single deposit and prove that the balance of the account is your separate property.  Now step forward a few years.  You have made many deposits to and withdrawals from “your” account.  At some point, it became impossible to prove how much of that account is community property and how much is separate property. At that point, the account is said to be commingled and thus entirely community property. Your actions have wiped out your separate property rights to the account.  If, for instance, you name your children as the beneficiaries of your commingled account, your spouse will be entitled to half of the account.

You can create a community property interest in separate property by making mortgage payments with your wages or expending your time building a business started before you were married. The rules regarding these mixed assets fill pages of legal texts and court cases. The important thing to remember is that contributions of labor or earned income while married add a community property component to previously separate property.

Spouses can modify community property rules by written agreement or gifts.  Agreements can be made before marriage, during marriage, or in connection with dissolution of marriage.  Each of these agreements has specific legal requirements beyond the scope of this short article.  Gifts, other than certain personal items, are usually not recognized unless they meet very specific formal requirements.

In the context of estate planning, you can give away all of your separate property and half of all the community property.  Everything you have while married is community property except for property brought into the marriage and property you received by gift or inheritance.  Your spouse can make gifts to you but substantial gifts must be properly documented.  Separate property can become community property if it is commingled with community property.  Contributing labor or money to separate property can lead to various community property interests in that separate property.

What if a spouse dies without a will or other estate planning?  In most cases, the surviving spouse receives all the community property and either all or a portion of undirected separate property.

I hope this brief article brings some clarity to California’s community property laws with regard to estate planning.  However, please understand that changing property ownership can have unintended tax, creditor, and other implications that can’t be explained in a short article.  Some of the details are highly technical.  It is surprisingly easy to accidently disinherit or otherwise harm you intended beneficiaries.