What is Separate Property and Community Property?
You may not know that California is considered a "Community Property" state. In Community Property states, assets owned by married couples or registered domestic partners are considered either "community" assets or "separate" assets. Whether an asset is community or separate property has a significant impact on how those particular items are distributed.
Community property, in general, includes assets that you earn through your labor (such as a salary) after your are married. If you own property that is considered community property, then the income from that property would also be considered community property. Community property is considered owned 1/2 by each spouse or registered domestic partner.
Separate property, in general, is assets that you owned prior to marriage, or assets gifted or inherited directly by you at any time, and would include the income generated from separate property that you own.
If couples want to be sure that their assets can be properly characterized at a future time, it is critical to keep community and separate property separate.
Married couples or those in registered domestic partnerships can agree to "transmute" their property. That means, they can:
- Convert community property into the separate property of either of them.
- Convert separate property of either of them into the separate property of the other of them.
- Convert separate property of either of them into the community property of both of them.
There may be a number of reasons for why a couple might want to do this, as it can affect the way assets are distributed at the time of death, and can help the couple achieve certain tax minimization goals.
It's important to note that registered domestic partners are not considered "married" under federal law. Therefore, the federal tax benefits available to registered domestic partners are limited.
If a couple meets with an estate planning lawyer, this is certainly going to be a part of the conversation, so be prepared.