The Impact of Community Property on Inheritance Matters

The default matrimonial regime in California is community property. While federal law determines how property is taxed, state law determines whether, and to what extent, a taxpayer has “property or “rights to property” subject to taxation.[1] In many U.S. states and foreign countries, community property as a matrimonial regime is unknown. Accordingly, California’s community property laws can unexpectedly affect the estates of individuals who believe their assets are subject to the laws of their home state and/or country.

Community Property Defined

Community property affects over 25% of the U.S. population and is the prevailing matrimonial regime of populous states such as California, Texas, Arizona and Washington. Community property rules have far reaching consequences. Community property determines how an asset is held, how income is imputed and how debts are divided. Thus, it is imperative that individuals domiciled in California and/or who maintain assets in California are aware of community property laws and how they impact them.

Community property as a concept is founded on the theory that both spouses contribute equally to the creation, maintenance and furtherance of the family unit. In keeping with this concept, California’s community property laws generally hold that spouses own, and owe, everything together. In other words, all property, other than separate property, acquired by either spouse during marriage is considered community property. Further, a presumption exists that all assets acquired during marriage are community property.[2] Typical examples of community property include salaries and wages earned by either spouse and income derived from community assets. Separate property includes property owned prior to marriage, property acquired by inheritance and/or gift and property acquired during marriage through the use of separate funds.[3]

Inheritance and Community Property

 Many countries and U.S. states prevent spouses from disinheriting a spouse and provide for a forced share of any property bequeathed. In California and other community property states, the spouse owns 50% of all community property assets and upon death inherits the remaining 50%. The owner of such property can bequeath separate property as he/she sees fit. If no will is probated, the assets would be subject to intestate succession. While such analysis appears straightforward, complications arrive when one spouse lives or owns property in a community property state or the parties have moved to/from a community property state.

In California, whether property is characterized as community property or not is determined by domicile. Specifically, the applicable law of the domicile of the parties determines an asset’s characterization at the time in which the asset was acquired.  Thus, it is necessary to examine the factual circumstances (intent, habitual abode, etc.) in existence at the time in which various assets were acquired. 

Moving From California

California holds that community property retains its character as such when it is removed to a common law state. [4] Thus, assets acquired while domiciled in California retain their community property characterization when the spouses move to a non-community state and/or country. Property acquired following the change of domicile would be characterized pursuant to the laws of the new state/country.[5]

Moving to California

Should a couple move to California from a non-community property state/country, the assets will retain the characterization consistent with the laws of their former domicile.  Thus, assets brought in from a non-community property state/country will not automatically be converted into community property. While the assets will not be automatically converted, such assets could be characterized as quasi-community property.

Quasi community property is property acquired by a spouse in a non-community property state/country that would have been characterized as community property if it had been acquired in California. Should a couple become domiciled in California and one spouse subsequently dies, their quasi community property could be treated like community property.

[1] Aquilino v. United States, 363 U.S. 509 (1960); Morgan v. Commissioner, 309 U.S. 78 (1940) (Accordingly, federal tax is assessed and collected based upon a taxpayer's state created rights and interest in property.)

[2] The burden of proof that a specific asset is separate property is on the party so contending.

[3] Property acquired by expending separate funds is determined through the “source” rule and “tracing.”

[4] See In re Marriage of Moore & Ferrie, 14 Cal. App. 4th 1472 (Cal. App. 1st Dist. 1993).

[5] However, it should be noted that complications could arise. For example, Tomaier v. Tomaier, 23 Cal. 2d 754 (Cal. 1944) holds that the rights of spouses under the community property regime are protected event when community funds are invested in land of another state. 

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