California is what is known as a community property state. In such states, any assets acquired over the course of a marriage or registered domestic partnership, with some exceptions, are regarded as belonging equally to both spouses or partners, regardless of which spouse or partner acquired them.
Suppose a husband purchases a car using money from a joint bank account he shares with his spouse. Because the car was purchased during the marriage with community funds, the spouse generally would be regarded as owning 50% of the car.
This distinction may not mean much during marriage, but when one spouse dies or if the spouses divorce, the characterization of the car as either separate property or community property will play a role in how the car is ultimately distributed or divided, respectively.
Suppose the husband wishes to leave the entire car to his niece in his will. Because the car is community property, the husband only has the right to devise his 50% share of the car to the niece. If he attempts to dispose of his wife’s 50% share of the car through his will, he would be violating the wife’s community property rights.
The same would hold true if the couple were to divorce. If the husband intends to keep the car for himself, his spouse would need to be provided with the cash equivalent of half the car’s value or other assets that approximate that amount.
That being said, it’s important to remember there are exceptions to community property laws. For instance, community property laws may not apply if a spouse waived their community property rights using a prenuptial or postnuptial agreement. In the same vein, community property laws may not apply to certain types of assets.
Is an inheritance considered community property in California? Continue reading to find out.
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Is an Inheritance Community Property in California?
An inheritance is not considered community property in California. Whether you receive an inheritance from a deceased loved one before marriage, during marriage or after marriage, it would be regarded as belonging solely to you.
Having said that, an inheritance could become community property under certain circumstances, so it’s important to be mindful of community property laws if you wish for your inheritance to exclusively remain yours. We’ll discuss what these specific circumstances are later in this article.
Is Inherited Money Community Property?
Inherited money is not considered community property, but it could become community property if you’re not careful.
The most effective method for ensuring money you inherit during marriage does not become community property is to keep it separate from community assets. In other words, place your inheritance in a bank account you open solely in your name or in a bank account you already have that’s solely in your name. It is also important to make sure that you do not commingle your inheritance funds with other community property (e.g., income earned during your marriage).
Is Inherited Real Estate Community Property?
Inherited real estate is not considered community property, but like inherited money, it could become community property under certain circumstances.
Suppose you inherit a house during marriage with a mortgage attached to it. If you use community funds to pay down the mortgage, a portion of the ownership interest in the house could become community property.
Is an Inheritance Split in a Divorce?
An inheritance generally would not be split in a divorce. However, if you are not mindful about keeping your inheritance separate from community assets during marriage, it could result in the inheritance becoming indistinguishable from community assets. Should this happen, your inheritance could be split between you and your spouse if you divorce.
Is an Inheritance Separate Property in California?
Yes, an inheritance, even if received during marriage, is considered your separate property. Separate property generally consists of any assets you owned prior to marriage, acquired as an inheritance or gift during marriage, or acquired after a separation or divorce.
Nevertheless, as we’ve already touched on, certain circumstances can cause an inheritance to no longer be your separate property. Continue to the next section to explore the circumstances that can cause an inheritance to become community property in California
4 Ways an Inheritance Can Become Marital Property
An inheritance is generally considered separate property, even if received during marriage. However, there’s no guarantee an inheritance will remain separate property unless you take certain precautions, such as keeping it separate from community assets and maintaining detailed financial records of what you do with it.
With that being said, many spouses who receive an inheritance during marriage wish for it to be shared with their spouse. If that’s your intention, there are steps you can take to ensure it becomes marital property.
When does an inheritance become marital property? Continue reading to explore some of the ways an inheritance can potentially become the property of both spouses.
1. Transmutation Agreement
According to California Family Code section 850, a transmutation agreement is a legal document that can be used to convert the character of property from:
- Community property to the separate property of either spouse
- The separate property of either spouse to community property
- The separate property of one spouse to the separate property of the other spouse
Suppose you inherit a real property from a deceased family member, making it your separate property. However, if you want to recharacterize the property as a community asset to ensure both your spouse and children are provided for should you and your spouse divorce or you pass away, you can do so by signing a transmutation agreement and adding your spouse’s name to the deed.
Remember, to convert the character of property, a transmutation agreement must be signed; only changing the deed or title generally would not suffice.
Family Code section 852 governs what makes a transmutation agreement valid. It states:
- A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to or accepted by the spouse whose interest in the property is adversely affected.
- A transmutation of real property is not effective as to third parties without notice thereof unless recorded.
- This section does not apply to a gift between the spouses of clothing, wearing apparel, jewelry or other tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taking into account the circumstances of the marriage.
- Nothing in this section affects the law governing characterization of property in which separate property and community property are commingled or otherwise combined.
- This section does not apply to or affect a transmutation of property made before January 1, 1985, and the law that would otherwise be applicable to that transmutation shall continue to apply.
Transmutation agreements can be invaluable in ensuring an inheritance is distributed according to its recipient’s wishes after their death or divided equally in a divorce, but because they can have a significant impact on spousal rights, it’s crucial they be approached with caution.
Courts typically review transmutation agreements to ensure they were not signed under undue influence or duress, or as a result of fraud. Even so, if signing a transmutation agreement could adversely affect your rights, discussing the agreement with a knowledgeable attorney before proceeding is of utmost importance.
2. Commingling
In the context of inheritances, commingling can occur when you mix your inheritance with community property. This could result in your inheritance being treated like community property.
If you’re comfortable with your spouse having access to your inheritance and potentially claiming half of it in the event of divorce or after your death, commingling might not be an issue for you. However, if you want your inheritance to remain your separate property, be sure to keep it clearly identifiable. We recommend depositing it into a separate account and maintaining detailed records of any transactions you make involving it.
3. Community Contributions
If you use marital assets to pay off, improve, or repair a property you’ve inherited, a portion of the property might be reclassified as community property. Similarly, if you use your inheritance to pay off, improve, or repair your community property, you may be entitled to a reimbursement of those contributions.
If you are concerned about the potential consequences of using community funds to enhance your inheritance, consider consulting with a knowledgeable attorney before proceeding.
4. After the Death of Spouse
Although the death of a spouse wouldn’t convert the character of your inheritance to community property, your spouse might receive your inheritance, or a portion of it, as part of their inheritance from your estate. This could happen if you leave your spouse your inheritance in your will or trust, or via another legally valid document, such as a transfer-on-death (TOD) deed. It also could happen if you die intestate (i.e., without a will).
When a person dies intestate, intestate succession laws, which you can find in California Probate Code sections 6400 – 6455, govern the distribution of their assets to their closest living heirs, which, if they were married when they died, would include their surviving spouse.
Under intestate succession laws, 100% of a deceased person’s community property passes to their surviving spouse; however, the percentage of the deceased person’s separate property — including any inheritances they received — that passes to the spouse depends on how many direct heirs the deceased has and what their relation to the deceased is.
For example, if the deceased leaves behind a spouse and a child or grandchild (from their predeceased child), the spouse would receive 50% of their separate property, with the child or grandchild receiving the remaining 50%. If there are multiple surviving children or grandchildren (from their predeceased child), the spouse would receive 33.3% of the separate property, with the children or grandchildren collectively receiving the remaining 66.7%.
To discover the exact percentage of your spouse’s separate property you’d be entitled to if they were to pass away without a will, refer to Keystone’s handy intestate succession chart or consult with a qualified probate attorney.
How Can You Prove an Inheritance Is Separate Property?
If you inadvertently commingled your inheritance with marital property, the burden of proof generally will rest with you to prove which portion of the community property is your separate property.
Ideally, you should avoid this situation altogether. If you receive an inheritance during marriage and wish for it to remain your separate property, take steps to keep it distinct from community assets. In other words, refrain from commingling it or using community funds to enhance it.
However, if the lines have already blurred and your inheritance is difficult to distinguish from community assets, there may be strategies you can employ to try to prove its separate character.
Documentation
Did a deceased loved one leave you an inheritance in their will or trust? Did they leave you an inheritance by designating you as a beneficiary on their bank or retirement account? Did they leave you an inheritance via a TOD deed?
If you have a copy of the document that verifies your inheritance or any other relevant records, these could serve as crucial evidence to prove that the assets in question are your separate property.
That said, while such documents can confirm that you received an inheritance, they may not be sufficient in establishing what assets the inheritance comprised or their value.
For example, if you commingle inherited money with community funds to purchase stock, and that stock significantly appreciates, the financial gains could be considered community property. This is because it may be difficult to determine how much of the gain was due to your separate property versus your community property. Conversely, if you had invested in stock solely with your inheritance, you generally would be entitled to all the gains.
Documentation is also critical if you and your spouse entered into an agreement (e.g., a prenup or postnup) to characterize your inheritance as separate property. Although documentation can be helpful in proving which community assets are your separate property, it’s possible additional evidence will be required. The following section explores another method for distinguishing separate property from community property.
Tracing
If you have maintained detailed financial records, tracing could help determine the extent to which community property is actually your separate property. However, this process can be tedious and costly, and it may not always yield successful results.
That said, in some cases, tracing can be highly effective in determining the origin of assets. Consider the example of one of our clients. She hired our firm after realizing her stepfather had wrongfully transferred nearly all the assets from the joint trust he had created with her mother to his own trust. Although his daughter believed he had funded his trust with his separate property, our investigation, which we conducted with the help of a forensic accountant who employed tracing, revealed that he had funded his trust with community assets. This led to a resounding victory for our client, who not only recovered all the misappropriated assets for the trust but also double damages due to the stepfather having committed elder financial abuse.
When tracing is not possible because, through no fault of your own, documents proving separate property are not available or were destroyed, it may be possible to use an alternative tracing approach called recapitulation to determine which assets are separate property. Unlike traditional tracing, recapitulation is an exhaustion method, operating on the principle that community funds are used for community expenses. Therefore, any remaining funds must be considered separate property by default.
Like traditional tracing, recapitulation can be a meticulous and expensive process. Therefore, taking proactive measures to keep your inheritance separate from the get-go can help avoid the need for this method altogether.
FAQs: Inheritance and Community Property in California
Although community property laws are generally straightforward, they can become complicated when inheritances are involved. If you haven’t found the answers you are seeking in the information above, explore our frequently asked questions on inheritances and community property below.
If you continue to have questions, call our firm to find out whether you qualify for a free consultation with one of our attorneys.
What happens when title to property conflicts with community property laws?
This was the important question the California Supreme Court ruled on in the case In re Brace. It affirmed that community property laws take precedence in actions between spouses during their lifetimes; however, in post-death proceedings, it’s possible title could take precedence.
Consider spouses who hold title to property as joint tenants with rights of survivorship. This means that the spouses co-own the property while alive, but when one spouse dies, the surviving spouse assumes full ownership of the property. In this instance, form of title would reign supreme. Hence, the Brace court concluded that title generally controls at death, but that the court should not solely rely on title when deciding whether a deceased person has a right to dispose of a property.
The Brace ruling, however, was slightly modified in the case Estate of Wall, where the California Supreme Court ruled that the title presumption applies in all probate contexts. This means that if the deceased spouse held title to property as a sole owner, then, even if the property was acquired during marriage, the deceased spouse would be presumed to be the sole owner of the property at death.
The Estate of Wall ruling highlights the importance of the manner in which spouses title their property, which influences how the property can be managed or transferred after death. To prevent inheritance disputes, spouses must carefully consider how they hold title and ensure any community property contributions are tracked through proper legal documentation.
Is my spouse entitled to my inheritance when I die?
It depends on the circumstances. Your spouse may be entitled to your inheritance if you commingled it with marital assets. Additionally, even if you kept your inheritance separate, your spouse would be entitled to receive a portion of it if you name your spouse as a pay-on-death beneficiary to the inheritance, leave the inheritance to your spouse in a will or trust, or die intestate.
Do I have to share my inheritance with my spouse?
No, you do not have to share your inheritance with your spouse. Your inheritance is your separate property.
However, the key word here is separate. If you deposit your inheritance into a bank account you jointly own with your spouse, you would, in effect, be sharing your inheritance with your spouse, since they own half of everything in that account.
While you have no obligation to share an inheritance with your spouse, you may not have a choice if you fail to take the proper precautions.
Is buying a house with inheritance money allowed?
Of course! Unless there are conditions attached to your inheritance, such as you only being able to use it to pay for college, you can do with your inheritance what you want, including buying a house with it.
Is a gift considered community property in California?
No, a gift is not considered community property in California. Just like inheritances, gifts are considered separate property, regardless of whether they were received prior to, during or after marriage.
The same rules that apply to inheritances apply to gifts.
Do assets acquired before marriage count as community property?
No, assets acquired before marriage do not count as community property. They are considered the separate property of the spouse that acquired them.
That said, if these separate assets are later commingled with community assets, they could become community property.
If a husband and wife die together, who inherits community property?
If a husband and wife die together, and the order of spouses’ respective deaths cannot be determined, one-half of the community property will be distributed as if the first spouse had survived the second, and the other half will be distributed as if the second spouse had survived the first, per California Probate Code section 103.
Still have questions about when an inheritance becomes marital property in California? We can help.
If you’ve received an inheritance and want to ensure it remains your separate property, it’s essential to take proactive steps to protect it. A key part of this is understanding California’s community property laws.
Navigating these laws can be challenging without guidance from professionals. Contact us today to find out how our experienced attorneys can help you safeguard your inheritance and enforce your spousal rights.
