California Community Property: What Married Couples Need to Know

California is one of nine community property states, which means married couples share equal ownership of most assets acquired during marriage. This affects how property is divided in divorce, how assets pass at death, and how you should structure your estate plan.

What Is Community Property?

Community property is property acquired by either spouse during the marriage, regardless of who earned the money or whose name is on the title.

Separate property is property owned before marriage, received as a gift or inheritance during marriage, or acquired after legal separation.

Presumption: In California, property acquired during marriage is presumed to be community property unless proven otherwise.

Community Property Examples

Usually Community Property:

• Wages and salary earned by either spouse during marriage
• Business income earned during marriage
• Property purchased with community funds
• Retirement contributions made during marriage
• Investment gains on community assets

Usually Separate Property:

• Property owned before marriage
• Inheritances (even if received during marriage)
• Gifts to one spouse only
• Property acquired after legal separation
• Personal injury awards (pain and suffering portion)

Mixed (Commingled) Property:

• Separate property home with community property mortgage payments
• Separate property business that grew during marriage
• Bank accounts containing both separate and community funds

Community Property and Estate Planning

At Death Without a Plan

If you die without a will or trust in California:

• Your spouse receives all community property
• Your separate property is divided between your spouse and children (or other heirs)

This may not match what you actually want.

At Death With a Plan

You have the right to give away:

• All of your separate property
• Your half of community property

Your spouse owns the other half of community property—you cannot give that away.

The "Step-Up" Advantage

California community property receives a full "step-up in basis" at the first spouse's death:

Scenario: You and your spouse bought stock for $50,000. It's now worth $500,000. One spouse dies.

In a common law state: Only the deceased spouse's half gets a step-up. If the surviving spouse sells, they pay capital gains on their half ($225,000 gain).

In California: All community property gets a step-up. If the surviving spouse sells immediately after the first death, they pay no capital gains tax.

This is a significant tax advantage unique to community property states.

Common Community Property Issues

Issue 1: Transmutation

Transmutation is changing the character of property from separate to community (or vice versa). This requires a written agreement.

Example: You owned a house before marriage. You want to add your spouse to the title as community property. This requires a proper transmutation agreement, not just adding their name to the deed.

Issue 2: Commingling

Commingling occurs when separate and community property are mixed together, making it difficult to trace what belongs to whom.

Example: You inherit $100,000 and deposit it into your joint checking account, where it mixes with community funds. Over time, you spend some and deposit more. Tracing the separate property becomes difficult or impossible.

Best practice: Keep separate property in separate accounts, carefully documented.

Issue 3: Community Property Improvements to Separate Property

When community funds improve separate property, the community may acquire an interest in that property.

Example: Your spouse owned a house before marriage. During marriage, you use community income to pay the mortgage and make improvements. The community may have a claim to some of the home's value.

Issue 4: Business Interests

Businesses owned before marriage are separate property, but growth during marriage may be community property.

Example: You started a business before marriage. During marriage, you work hard and the business triples in value. Your spouse may have a community property interest in that growth.

Estate Planning for Community Property

Title Property Correctly

How property is titled matters:

• "John Smith and Mary Smith, as community property" - Owned equally as community property
• "John Smith and Mary Smith, as community property with right of survivorship" - Community property that automatically passes to survivor
• "John Smith, a married man, as his sole and separate property" - Separate property (requires spouse's consent)

Consider a Community Property Agreement

A community property agreement can:

• Confirm the character of specific assets
• Convert separate property to community property
• Protect the separate property character of assets

Coordinate with Your Trust

Your revocable living trust should:

• Clearly identify community property and separate property
• Address how each category is distributed
• Account for the full step-up in basis benefit
• Provide for smooth transition to the surviving spouse

Special Considerations

Military Families

If you're stationed in California but have a legal domicile elsewhere, different rules may apply. Military pay may be subject to the servicemember's domicile state rules.

Moving From Another State

If you moved to California from a common law state, you may have "quasi-community property"—property that would have been community property if you'd lived in California.

Prenuptial and Postnuptial Agreements

These agreements can alter the default community property rules, but they must be properly drafted and executed.

At Bordeaux Legacy Law, we help California couples understand how community property affects their estate plan and structure their planning accordingly.