Community Property vs. Separate Property in California: Why the Facebook IPO Makes This Topic Relevant

It is fairly well-known that one of the primary reasons for divorce is a downturn in a married couple’s financial situation. The hardship of survival without enough money to pay your bills will put a strain on even the happiest marriages. A less-than-happy marriage stands even less chance of surviving tough economic times, especially if the couple was previously accustomed to a much higher standard of living.

On the other hand, it is not so well-known that sudden wealth can put an equal strain on a marriage and is also a major cause for divorce. In the Silicon Valley area, where our offices are located, we have seen the results of both financial boom and bust. Likewise, we have seen almost as many divorces due to sudden wealth as we have from sudden financial hardship.

We suspect that shortly after Palo Alto-based Facebook’s stock goes public, many Bay Area residents will suddenly be worth millions – on paper at least. This looming event, and the expected divorces as a result, brings us to the topic of the difference between community property and separate property in California, which we discussed this past Saturday afternoon on our weekly KDOW 1220 AM radio show and webcast.

California is one of ten states that recognize community property. In a nutshell, what that basically means for a married couple, or registered domestic partners, is that from the date of marriage to the date of legal separation, all income earned by either person becomes community property. Regardless of which partner earned the money, both partners “own” an equal 50% share of it.

The exceptions to what is community property in a marriage or partnership are known as separate property. The separate property exceptions include gifts from parents and inheritances, but those assets need to be handled properly to ensure they do not become community property through commingling and transmutation.

Clear lines of distinction need to be established between community property and separate property, so it is important to keep separate financial accounts and good records of all your transactions related to each set of property.

For example, if you are married and you inherit a house that you want to keep as your own separate property, put the property in your name only and pay any taxes or maintenance expenses for it from a separate bank account. Otherwise, expenses paid from a joint bank account indicates a willingness to share ownership of the property, which can (and probably will) be consider commingling and part of a transmutation process.

If a portion of a mortgage remains on the inherited property, be sure to also pay that from the separate bank account. In this example, a spouse or partner may be required to sign a document that indicates a willingness to disown any interest in the newly acquired property.

If one member of a couple owns some separate property, they can still file a joint tax return, but all of the facts and finances about the separate property need to be properly detailed and filed.

One of the most important aspects regarding ownership of real estate is how the title to the property is held. The primary issue is the concept of Joint Tenancy versus Tenancy in Common, which determines who owns the property when a legal partner dies.

If the property is held under a Joint Tenant title, the surviving partner gains full ownership automatically. The surviving partner will need to file an Affidavit of Death with the local Recorder’s office.

With a Tenancy in Common title, the heirs inherit the deceased partner’s percentage of the property. In a business partnership, the percentage of ownership can vary according to the terms of the title.

If Joint Tenancy or Tenancy in Common is not written in a title, then Tenancy in Common will be in effect. The transfer of property to survivors will need to occur in probate court, so, for example, the right of ownership can be determined for a surviving spouse and child whose names were listed on the title, but without a percentage of ownership indicated.

Go to Radio Show Podcast ArchiveIf you need to make a legal change to a title, we highly recommend that you avoid the serious problems that can occur, if it is done incorrectly. We suggest you hire a title company or an attorney. Our preference is to use a title company, because it can re-insure the new title.

During this past weeks’ radio show, we also discussed a few other issues related to the distribution of property to beneficiaries, as well as a few of the advantages and disadvantages of establishing a living trust to manage the distribution of an estate. You can download or stream a podcast of this show, which originally aired on February 11, from our Radio Show Podcasts archive.

If you have concerns about the status of your property titles and would like a free consultation with Connie Yi, a California Estate Planning Attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

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