Separate, Community or Quasi-Community Property in California?

For a successful estate plan, each client needs to know what property is truly owned by the client. Depending on the character of the property, the client will decide how to dispose of his/share share of such property. In fact, my clients who are married often times believe that property titled in one of the spouse’s name is that spouse’s separate property. To avoid such future confusions, I’ve decided to write this general overview of different types of property in California, to help in distinguishing among separate, community and quasi-community property.

DISCLAIMER: THIS IS NOT A LEGAL ADVISE AND COULD BE OUTDATED BY THE TIME YOU READ IT. NO ATTORNEY-CLIENT RELATIONSHIP EXISTS BETWEEN YOU AND ATTORNEY ANDREI JINGAN BY THE SIMPLE FACT OF READING THIS ARTICLE. YOU SHOULD CONSULT WITH A QUALIFIED PROFESSIONAL BEFORE MAKING ANY LEGAL, TAX OR INVESTMENT DECISIONS!

To start, California is a community property state and the following four general property character presumptions exist:

1. Community Property. Property acquired during marriage is presumed community property;
2. Separate Property. Property acquired before, during separation, or after dissolution of marriage; property acquired by gift, will, or inheritance; the fruits of separate property (e.g. rents from separate property acquired before/during marriage); and property acquired in exchange for separate property;
3. Quasi-Community Property is property acquired by either spouse that would have been community property had the spouse been domiciled in California at the time of acquisition, and it is treated like community property; and
4. Married woman’s special presumption. If property is titled in wife’s name alone before January 1, 1975, it’s presumed to be separate property (as a gift).

The categorization of the property is very important for estate planning purposes, as the client would be able to dispose of only what is truly owned by him/her. For example: (1) at divorce, community property is divided “in kind” and each spouse is entitled to receive one-half interest in community property assets; or (2) by will or trust, decedent or trust maker may dispose of his/her 50% share of the total community property plus all his/her separate property, and if the property wasn’t disposed through a will or a trust, the surviving spouse of intestate decedent is entitled to all community property plus at least one-third of decedent’s separate property, depending on number of issues (aka children) and parents.

Also, special rules apply to some categories of property as follows:

1. Stock Options.
   • Community Property:
     • Options that become exercisable (vest) during marriage;
     • If not exercisable until marriage ends, portion under “time rule”* – percentage of married time between acquiring and vesting.
   • Separate Property:
     • If not exercisable until marriage ends, portion under “time rule” – percentage of time after marriage and vesting.
2. Business Goodwill.
   • Community Property. To the extent goodwill is earned during marriage, the following valuation methods are used:
     • Market sales valuation. Price of the goodwill would command in a sale of the business; and
     • Capitalization of past excess earnings. Does not contemplate a sale. Ascertains the present value of the future stream of income that the goodwill developed during the marriage will generate in the business.
   • Separate Property. Everything else that is not considered community property.
3. Personal Injury Damage Recovery for a Tort Caused by a Third-Person.
   • Community Property.
     • Damages recovered for an injury that arises during marriage.
   • Separate Property.
     • Damages for injury after separation (must reimburse community for any expenses);
     • Damages after divorce (unless interest of justice requires otherwise)
4. Personal Injury Damage Recovery for a Tort Caused by One of the Spouses.
   • Recovery is always the injured spouse’s separate property.
5. Retirement Pensions.
   • Community Property.
     • Portion of benefits earned during marriage (even if actually received after divorce) – apportioned based on when earned under “time rule”;
   • Separate Property.
     • Portion of benefits earned after permanent separation.
6. Disability Pay; Workers’ Compensation.
   • Community Property.
     • To the extent that compensation is intended to replace marital earnings
   • Separate Property.
     • To the extent that compensation is intended to replace post-separation earnings
7. Severance pay.
   • Community Property.
     • To the extent pay replaces marital wages
   • Separate Property.
     • To the extent pay replaces post-separation wages
8. Life insurance – term (covers risk of death).
   • Final premium rule: The estate community property/separate property that paid the most recent premium owns the policy, or in the event of the insured’s death, receives the proceeds of policy
9. Life insurance – whole (term plus cash value).
   • Any cash value of policy (before or after death of insured) is apportioned according to % of premiums paid by each estate community property/separate property;
     • Proceeds of policy after death of insured (term portion) received according to final premium rule.

* “Time rule”: Community and separate interest are respectively based on the period of time corresponding to marriage starting from when it was earned, and the period of time between filing for divorce and when the earning stops or asset vests.

Furthermore, the spouses might change the default character of their property through express acts such as a premarital agreement or transmutation agreement. Thus, if such agreements exist, they have to be shared with your estate planning attorney before your trust and/or will are drafted.

Please be advised that this article is not exhaustive and additional exceptions might be taken into account when determining the character of your property. Don’t hesitate to reach out if I can help you with your estate planning needs.