When it comes to estate planning, our Orange County estate planning attorneys will tell you that the nature of your property is very important. This is especially true in Orange County and all of California, which is a community-property state. Understanding how community property ownership affects your estate plan is crucial. Here is what you need to know.
What is community property?
California, along with eight other states, is a community-property state. What that means is any property that is acquired during the course of marriage will be considered equally owned by both spouses. On the other hand, separate property is the property each individual acquired before marriage. There are two exceptions. Gifts and inheritances which are given only to one spouse are considered separate property, even if acquired during the marriage. Also, if a couple does not divorce, but legally separates, the surviving spouse will not be entitled to any of the deceased spouse’s property.
How does community property affect estate planning?
In terms of estate planning, that means each spouse is only allowed to dispose of their own 50% share of the community property by trust, will, or other estate planning tool. The remaining 50% must be distributed to the surviving spouse. Spouses can also choose to leave their share of the community property to each other.
How to avoid disputes over marital property through proper planning
The first step in creating an estate plan that involves community property is to carefully delineate between separate property and community property. However, that is not always easy to do. The process is even more complicated when spouses have remarried and retained any separate property from prior marriages. California law provides a way for married couples to convert their property status from separate to community, or the other way around. The process is referred to as “transmutation.” But, if a couple makes this election, then the estate plan must be consistent with the changes in ownership.
An example of issues that can arise with community property
A case out of San Mateo County provides us with an example of the legal issues and disputes that can arise if community property is not handled correctly in estate planning. A man passed away leaving behind his third wife, to whom he had been married for 22 years. When they got married, the husband created a living trust into which he transferred a home that he purchased during his second marriage.
Six years after including the home in the trust, the husband and his third wife amended that trust by transmuting the separate property being held in trust into community property, with the exception of the home, which remained his separate property as stated in a “side agreement.” However, a few years later, the husband changed his mind and destroyed the side agreement in the presence of his attorney.
The problem arose in the fact that there was still language in the trust document that referred to the side agreement and that language was never modified. This resulted in a legal dispute over the home after the husband passed away.
Mistakes in handling community property can have huge consequences
Because of the mistake in failing to modify the trust, the home was still considered separate property when the husband died. So, the surviving spouse was entitled to her husband’s community property but the house would have to be distributed to other beneficiaries. In this particular case, that meant the wife would lose her interest in the home which was valued at more than $3 million. It also meant she would be subject to huge estate tax consequences.
The husband’s attorney was able to prove the husband’s real intent
Luckily, the husband’s attorney was able to submit a written declaration with the probate court explaining that it was the husband’s intent to transmute all of his property, including the home, into community property, and that he had destroyed the side agreement in his presence. The court ultimately found this evidence persuasive.
Consult with one of our Orange County estate planning attorneys
Although a drafting mistake resulted in the legal dispute that occurred in that case, it was the decedent’s long-term relationship with his estate planning attorney that helped the court recognize the client’s intentions. Estate planning is typically more successful with the assistance of experienced Orange County estate planning attorneys.
If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.
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