Community Property Estate Planning California

What Is Community Property?

California is a community property state. Under California law, most property acquired by a married couple during marriage is community property — owned equally by both spouses. This includes wages, salaries, and income earned by either spouse during marriage, property purchased with community funds, and business interests acquired during marriage. Community property is distinct from separate property, which belongs to one spouse individually.

Separate Property vs. Community Property

Separate property includes: property owned by either spouse before marriage, property received as a gift or inheritance during marriage (even if received during marriage), and property acquired with separate property funds. The distinction matters for estate planning, divorce, and tax purposes. Commingling separate property with community property can convert it to community property — careful record-keeping is essential to maintain the separate property character of pre-marital assets.

Tax Advantages of Community Property

Community property has a significant tax advantage over joint tenancy and other forms of co-ownership: the double step-up in basis. When one spouse dies, both halves of community property receive a step-up in basis to fair market value — not just the deceased spouse's half. This eliminates capital gains tax on all appreciation during the marriage on both halves of community property.

Double Step-Up in Basis

The double step-up in basis is one of the most valuable tax benefits available to California married couples. Example: A couple purchased stock for $100,000 during marriage. At the first spouse's death, the stock is worth $1 million. Under community property rules, both the deceased spouse's $500,000 share and the surviving spouse's $500,000 share receive a step-up to $500,000 each — a total basis of $1 million. The surviving spouse can sell the stock immediately with zero capital gains tax. Under joint tenancy, only the deceased spouse's half receives the step-up — the surviving spouse's half retains the original $50,000 basis.

How to Title Community Property

California married couples can title community property as: (1) Community property — both spouses own equally; both spouses must consent to transfer. (2) Community property with right of survivorship — avoids probate while preserving the double step-up in basis. (3) Joint tenancy — avoids probate but loses the double step-up in basis (only the deceased spouse's half is stepped up). KDA generally recommends community property with right of survivorship over joint tenancy for California married couples.

Community Property Planning

KDA's community property planning strategies: (1) Title appreciated assets as community property (not joint tenancy) to preserve the double step-up in basis. (2) Consider a community property agreement to convert joint tenancy property to community property. (3) Maintain records to establish the community or separate property character of all assets. (4) In estate planning, ensure the living trust properly characterizes assets as community property to preserve the double step-up. (5) In divorce planning, understand that community property is divided equally — separate property is not subject to division.