Determining what constitutes marital or separate property is an important step in estate planning. This area of law is principally governed by the legal term “community property.”
1. What is community property?
The California code defines community property as “all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state”. Calif. Family Code §760.
2. What is separate property?
In California, the separate property of a married person includes: “(1) All property owned by the person before marriage. (2) All property acquired by the person after marriage by gift, bequest, devise, or descent. (3) The rents, issues, and profits” of their separate property, as well as earnings acquired by a spouse while living separate and apart from the other spouse. Calif. Family Code §§770(a)(1)-(3) and 771(a).
3. Can I alter the classification of property during marriage?
Yes, a spouse may alter the characterization of property during marriage in writing or by their conduct through processes known as “transmutation” or by “commingling” assets.
Transmutation typically involves drafting a written document changing the characterization of a spouse’s interest in property. For example, a spouse may have acquired property prior to marriage (separate property) that they wish to transmute to community property, so the other spouse has a one-half interest in the property. In California, the transferring spouse must sign a declaration expressly stating that they wish to transmute the property from their separate property to community property.
In contrast, “commingling” of assets does not typically require an express declaration to alter the characterization of property. While separate and community property normally retain their original classifications, if a spouse deposits their separate property into a community property account, for example, the separate property can be classified entirely as community property unless the depositing spouse can trace the funds deposited into the joint account to their separate asset. Therefore, it is important not to commingle community and separate property if the spouses wish to retain the original characterization of an asset.
4. I purchased a house before marriage, is that community property?
Real property acquired before marriage will typically be classified as both community and separate property. While the asset is normally considered separate property of the acquiring spouse, some portion of the asset will usually be characterized as community property if mortgage payments or other improvements were made to the property using community earnings such as wages.
5. What if I purchased a car during the marriage that is titled in only my name?
Community property normally includes all property acquired during the marriage, except by gift or inheritance, no matter which spouse holds title to the asset. Therefore, the vehicle would be considered marital property in most cases. For purposes of determining the characterization of property held by spouses, it is often irrelevant who holds title to the property. Instead, it is important to determine when the asset was acquired, either prior to or during the marriage, as well as the source of the funds used to acquire the asset. For instance, if the car were purchased during the marriage using funds from a spouse’s separate account earned prior to the marriage, then the vehicle would normally be considered the spouse’s separate property assuming the source of the funds can be traced to the separate account.
7. How does community and separate property relate to estate planning?
It is critical to first determine the nature of any property held by a married couple, since the characterization of assets will determine what property they may transfer by will or otherwise devise to third parties, such as their children. Generally, a spouse may transfer one-half of the community estate to others, all of their separate property which does not involve a community property interest, and none of their spouse’s separate property. A spouse who attempts to devise the other spouse’s interest to a third party could see the transaction voided and incur unnecessary costs of litigation.