How California's Community Property System Affects Your Estate Plan

As an estate planning law firm in California, we often encounter questions about how marriage impacts estate planning. California's community property system plays a crucial role in how assets are distributed upon death or divorce, and understanding this can significantly influence your estate planning strategy.

What is Community Property?

In California, any assets acquired by either spouse during the marriage are likely considered community property and are owned equally by both spouses. This includes wages earned, property bought, and debts incurred during the marriage. However, assets owned by one spouse before the marriage or received as a gift or inheritance during the marriage are typically considered separate property and are not divided equally in the event of death or divorce.

Impact on Estate Planning

1. Newly Married with Few Assets

For couples who enter marriage with minimal assets, most of what they accumulate during the marriage will be considered community property. This means that in the event of one spouse's death, the surviving spouse automatically inherits the deceased's share of the community property, unless stated otherwise in their estate plan. It's essential for these couples to consider drafting an estate plan that address how they wish their assets, including potential future acquisitions, to be handled upon their deaths.

2. Couples with Substantial Separate Assets

Couples who enter a marriage with significant separate assets often face more complex estate planning needs. Here, distinguishing between what is separate and what is community property is crucial. These couples should consider agreements such as prenuptial or postnuptial agreements that clearly define which assets remain separate and how future earnings and acquisitions should be treated. Effective estate planning ensures that the initial separate property remains protected and is distributed according to the individual's wishes, rather than being subject to community property laws at death.

3. Blended Families

Blended families often face the most complexities in estate planning due to children from previous relationships and various separate assets. In such cases, it's vital to specify which assets are to remain separate and how the remaining community property should be divided among the current spouse and any children from previous relationships. Trusts can be particularly useful in these situations to allocate assets specifically to children from previous marriages while still providing for the current spouse.

California’s community property laws can significantly impact estate planning strategies for married couples. Whether you are starting fresh with few assets, have substantial separate property, or are part of a blended family, understanding how these laws affect your estate plan is crucial. Proper legal guidance can help ensure that your assets are distributed according to your wishes, providing peace of mind and financial security for your loved ones. As always, consulting with an experienced estate planning attorney can help navigate these complexities and tailor a plan that best suits your unique family situation.

Marriage: You Either Are Or You Aren't

You’re either married or you aren't. There’s no in between. California does not recognize what some may call “common law” marriage. There’s no magic number of months or years before a romantic relationship transforms miraculously into a marriage.

For the “it’s just a piece of paper, our love is what’s important” crowd, we’re here to tell you that marriage is much more than that. Among other things, marriage confers rights upon someone you are not blood related to. Rights that are often unique to a spouse. In other words, if you’re unmarried–meaning you do not have a marriage license from a government agency–then the law views your partner as a friend that you really, really like.

From an estate planning perspective, a spouse is a family member. They get default rights against a deceased spouse’s estate. They receive major tax benefits from local, state, and federal taxing authorities. The law is very protective over surviving spouses. Not so much over long term unmarried partners, or even “we’re pretty much married” people. Those are all roommates under the law, and they get no special benefits.

What about domestic partners? Surely, that’s a special designation, right? Domestic partnerships are only recognized by some state and local governments. The federal government has no recognition for domestic partnerships. To the federal government, you’re either married or unmarried.

But some people have children together and never get married. That’s an exception, right? Nope. You certainly share very important responsibilities with one another, but you’re still not married spouses under the law. End of story.

Marriage is much more than some mere formality. It’s a very important legal union between two people.

That all being said, marriage is not for everyone. And that’s totally fine! However, if you do decide to not marry–for WHATEVER reason–then it is extremely critical that you create an estate plan, and specifically provide for any unmarried loved ones that you want to care for. And also to name your unmarried partner as someone who may have legal authority to assist you, and vice versa. Without reducing your wishes to writing, your unmarried partner will receive no special treatment by default, nor will they have legal authority to assist you if that scenario arises.

Whether you are married, but especially if you are not, it is critical to have your wishes reduced to writing so that the appropriate people (and pets) are cared for and that the right people have the appropriate legal authority to act when necessary.

Are You Married?

There is a common misconception that California honors “common law marriage” after seven years of living together.* 

*(The misconception sometimes has a different number of years associated with it.) 

In California, there is NO common law marriage. There is NO seven year rule (or any other year rule) to establish a marriage. The only way to be married in California is to marry with a state license and certificate from the county clerk. 

And if you’re not married, then under the law, you and your significant other have no more rights than roommates. 

There’s no legal in-between. 

If you live with your significant other for 50 years, you’re still not married. If you have children together, you’re still not married. If you share ownership of a home, you’re still not married. The only way to be considered married is to actually get married. 

So why is this significant? Well, in sum: married couples enjoy benefits that unmarried couples do not. Married couples are considered family (e.g. for visitation in a hospital, healthcare benefits, or even inheritance); they can own community property (which has its own benefits); and they have different tax treatments. 

A registered domestic partnership is also not marriage. Although California recognizes domestic partnerships, the federal government does not. The federal government only recognizes marriages. 

So that marriage certificate is not just a piece of paper. It has major consequences and impacts on your rights, benefits, and obligations. If you would like to discuss how your situation would be affected by getting married (or not), please contact us for a free consultation.

Estate Planning for Noncitizen Spouses

Today, 44% of Californians were born out of the state. And the proportion of foreign-born residents (28%) is nearly double that of transplants from other states (16%). From an estate planning standpoint, the big-picture concepts hold true whether or not someone is born in California. Non-Californians own property just like Californians do. Similarly, most everyone has loved ones who they care for most, regardless of citizenship or residency.

However, tax treatment is different depending on one’s citizenship and residency. Complications arise when one or both spouses in a married couple are not U.S. citizens.

If you and/or your spouse are non-citizens of the United States, then two major concepts will play a role in your estate plan: 1) the Unlimited Marital Deduction; and 2) the Gift and Estate Tax Exemption.

1. Unlimited Marital Deduction
   Married citizen couples enjoy a tax benefit called the “unlimited marital deduction”. Citizen spouses can transfer property back and forth between each other⁠—lifetime gifts or transfers on death⁠—and it is never a taxable event. Non-citizen spouses do not get this benefit. If your spouse is not a U.S. citizen, and you give them a gift, then it is only tax-free up to $154,000 a year (in 2019). (This amount is indexed for inflation). For example, adding your non-citizen spouse onto the title of your family home could potentially become a taxable gift. Or upon the citizen spouse’s death, the non-citizen inherits all of the marital assets without the marital deduction. Thankfully, estate planners have techniques, like a Qualified Domestic Trust, to assist non-citizens avoid unnecessary taxable events.

2. Gift and Estate Tax Exemption
   Married couples who are both citizens, or if they are legal permanent residents (green card holders), are granted a unified gift and estate tax exemption. In plain terms, if citizens or green card holders transfer property in the amount of $11.4 million (in 2019) or less then no gift or estate taxes are owed. (This amount is also indexed for inflation). That amount includes all lifetime gifts with whatever you own at death. In large part, citizens do not need to worry about making transfers to their citizen spouses. However, non-citizens only receive a $60,000 exemption from the gift and estate tax. That’s not a typo. Leaving property to a non-citizen could result in a lot of estate taxes without proper planning. For more about the gift and estate tax, read our previous blog post.

Putting the above concepts to work, if spouses transfer property between each other, and the recipient spouse is a non-citizen, then the marital deduction is nonexistent, and the citizen spouse would have to employ their gift and estate tax exemption, if they have one, where they otherwise would not have to. Then later, if the non-citizen spouse passes property to any children, the non-citizen spouse would not have the gift and estate tax exemption a citizen spouse would have. The result could be an avoidable disaster.

Non-citizens largely have the same desires and wishes that citizens have. Their legal status is merely different than that of citizens. However, that legal distinction does create challenges for which a plan is necessary. Do not leave your loved ones with an undesired mess. Get ahead of the issues by planning now.

Married: You Either Are or You Aren't.

Have you heard that story about the couple who lived together for seven years, and then they accidentally became married? Or what about the one where your friends were in a “common law” marriage?

Well… they’re both bogus concepts. At least in California. We don’t even know where the “seven year” part came from.

In California, you’re either married with a state license and certificate from the county clerk (and a few other requirements) or you’re not married. Period. There’s no intermediary status. There’s no “common law” marriage. You can’t accidentally find yourself in a marriage. The law doesn’t care how long it took your significant other to propose, or the size of the ring… or whether there was a ring at all! There are a dozen or so states that recognize “common law” marriage, but we’re not one of them.

So how does the law view your live-in significant other? You know, the person you’ve been living with romantically for years?

To put it simply: short of marriage, the law views your significant other as a roommate. It doesn’t matter how long you’ve lived together, whether you have children together, or whether you share ownership of property. You need that marriage license in order to be considered lawfully married.

Married couples enjoy benefits that unmarried people do not. Married couples are legally considered family (for example: when visiting one another in a hospital, or for inheritance purposes, or for health care benefits). Unmarried couples cannot own community property. That’s only for married couples, too. Also, tax treatment for married couples is dramatically different than for an unmarried couple.

You may have heard of “Registered Domestic Partners”. Or just “domestic partners”. But that has its own set of requirements, and is governed by state law. It doesn’t happen accidentally or automatically. And it’s only recognized in a few states (including California), but not by the federal government, like marriage is.

A couple’s decision not to marry does not detract from the love, trust, support or any of the interpersonal relationship benefits married couples can share. However, it is important for an unmarried couple to know that the law treats couples in vastly different ways based solely on marital status. A marriage certificate may literally be “just a piece of paper” but that piece of paper has important legal ramifications.

If you would like to discuss how your situation would be affected by getting married (or not), please contact us for a free consultation.