California is known as the Golden State, but if you live there, you might do better to focus more on its status as a community property state...which can have a profound effect on your finances. If you are married, were married or plan to be married in California, the community property system can impact your life in a big way. Here's an overview.
Community Property in California
When people get married, two households are blended into one and that impacts finances. The couple has to decide who pays the mortgage, if they will have a joint bank account and how they should take title to any real and personal property. Will they maintain separate finances or merge them? And who will get what in a divorce?
It's easy enough to ignore these practical matters as the romance of a new marriage takes center stage. That's why state laws about division of marital property are extremely important. If you live in California, the default method of holding property when you are married is called community property, and it essentially divides 50/50 everything earned by either spouse during the marriage.
Read More: California Community Property Laws: Community Property Vs. Separate Property
Community Property California Law
California is one of nine states that have adopted community property laws. Although any California couple is free to decide for themselves how they will hold marital property, community property law applies if they do not sign a written contract with each other about this important financial matter.
Under California's community property law, when a couple marries they become a community. Any money that either spouse earns and any debt either one incurs during the marriage belongs to the community. If it must be divided, one-half is allocated to each spouse. This most often happens in a dissolution or after a death.
Different Kinds of Property
Does the word "property" bring to mind a house or condo with your name on the door? Be advised, the "property" in community property doesn't stop there. Property in a marriage, for the purposes of community property laws, can range from a goldfish to a patent.
Property can be physical, like real estate or vehicles. Furniture is property, as is clothing, jewelry, art, plants and surfboards. Any physical object that has value is property under the law. But that's not all.
Some of the most valuable property might not be physical and you may not even have it yet, just the right to it in the future. Property, for the purposes of California's community property laws, can include:
- money in bank accounts.
- cash on hand.
- security deposits on rental units.
- pension plans.
- 401(k) plans.
- life insurance with a cash value.
- a business.
- copyrights or patents.
- royalty rights.
Community Property Versus Separate Property
In California, not every asset owned by spouses is community property. Some property is classified as separate property and belongs to one spouse only.
What is separate property? Any money or assets a spouse owns before the marriage remains that spouse's separate property. In addition, any money or assets a spouse inherits or receives as a gift during the marriage are also that person's separate property. Finally, any money earned from separate property (like rents received from a separate property, real estate holdings, or interest on a separate property account) is also separate property.
If spouses separate, the community ends. Wages earned after the date of separation are the separate property of the spouse who earns them. Property purchased with post-separation earnings is also separate. If in doubt, look to the source of the funds used to purchase property to determine its community/separate status.
Community Debt in California
Any time either spouse incurs a debt during a marriage, it is a community debt. This is true even if the debt was kept secret from the other. All community property can be held liable for repaying the debts of one spouse. For example, a spouse's secret gambling debts is a community debt, owed by both spouses. On the other hand, the non-debtor spouse's separate property usually cannot be used to pay the debt.
Commingling Community and Separate Property
You must take care with your separate property to avoid mixing it up with property belonging to the community. If you don't keep that separate property separate, but instead commingle it with community property, it can become community property.
A typical example is a bank account you hold before marriage. If you keep using it during marriage, depositing your salary (which is community property) into it, and paying community bills out of it, the court may find the funds so mixed that the account loses its status as separate.
It's also easy to commingle separate and community property when one of the spouses owns a business before marriage. That spouse continues to work in the business after marriage. All of the value added by the post-marriage work is for the community. Thirty years down the road, it may be too hard to distinguish the separate part from the community part for a court to divide it.
Transforming Separate Property
You can also transform separate property into community property in California, either intentionally or accidentally. For example, if you own a home before marriage, it is your separate property.
However, if, after marriage, you add your spouse's name to the title of a property you owned before marriage, you can be considered to have made a gift of the property to community, transforming it into community property. This can have serious repercussions in case of a divorce, since each spouse will be entitled to half the value of the property.
Community Property and Divorce
Many people start thinking about community property law only when their marriage is breaking up. Lots of marriages end in dissolution in California and, when that happens, assets must be divided between the two spouses. Whether the spouses negotiate a divorce agreement or the the court has to divide up their assets and debts between them, community property laws guide that division.
How does a court tackle a property division under California community property laws? It divides up the property and debts into separate property and community property. Each spouse is awarded their separate property and debts. The community property and debts are divided equally between the spouses.
Sometimes a court has to deal with quasi-community property, property a couple owned or acquired in another state before moving to California that would have been community property if acquired in the state. This property is generally treated like community property under California law.
Community Property and Death
Community property also plays an important role when a spouse dies, since that is also a termination of the community. If the deceased spouse hasn't left a will, all of the community property passes to the surviving spouse. The separate property of the deceased spouse passes according to the intestacy laws.
However, even if the deceased spouse left a will, the will can bequeath only that spouse's separate property and her share of the community property. It cannot be used to transfer ownership of the surviving spouse's share the community property.
What if the deceased spouse held sole title to property, then leaves a will bequeathing it to a third party? The court is not bound by the title documents. It will look to the source of the funds used to purchase the property to determine its community or separate character.
- California Courts: Property and Debt in a Divorce or Legal Separation
- Bohm, Wildish & Matsen: What is Community Property vs.Separate Property?
- IRS: Community Property Laws
- Kinsey Law Offices: Division of Community and Separate Property in California
- Stimmel Law: Community Property Debts: When is the Spouse Liable for the Debt Incurred by the Other Spouse?