Characterization Of Property
The separate property of a married person generally consists of (i) all property owned by the person before marriage, (ii) all property acquired by the person during marriage by gift, bequest, devise, or descent, and (iii) the rents, issue, and profits of the person’s separate property. For example:
- If one spouse owns shares of stock in a publicly traded company before marriage, the stock and associated dividends are that spouse’s separate property.
- If one spouse inherits shares of stock in a publicly traded company during marriage, the stock and associated dividends are that spouse’s separate property.
The community property of married persons generally consists of (i) all property acquired by either or both spouses during marriage except (ii) that property which is the separate property of either or both spouses. For example:
- If one or both spouses earn income from third-party employment during marriage, such income is the parties’ community property.
- If community property income is deposited into a jointly titled savings account, the deposited funds and associated interest are the parties’ community property.
Mixed Character Property
One spouse’s separate property can develop a community property component as a consequence of events that occur during marriage. For example: If one spouse acquires a business before marriage, the business is that spouse’s separate property at the date of marriage. However, if the business increases in value during marriage as a result of the personal services, time, skill, and effort of either or both spouses, the portion of the increase attributable to those contributions may be community property in character.
If one spouse acquires a home before marriage, the home is that spouse’s separate property at the date of marriage. However, if community property funds are used to pay down the mortgage or to make improvements, the resulting increase in equity may be community property in character. It is also possible for community property to develop a separate property component, or to become subject to a separate property right of reimbursement, as a consequence of events that occur during marriage. For example:
- If married persons open a jointly titled savings account and deposit into it only community property funds, the funds on account are the parties’ community property. However, if one of the parties subsequently inherits funds that are deposited into the account, the funds then in the account may be partly community property and partly separate property in character.
- If married persons purchase a home in a form of joint title such as joint tenancy, the home is the parties’ community property. However, if one of the parties contributes separate property to the downpayment on the home or to improve the home, that party may have a right to be reimbursed for such contributions.
Transmutation Of Property
A transmutation of property means a change in the character of the property.
Married persons may by agreement or transfer do any of the following: (i) transmute the parties’ community property to the separate property of either spouse, (ii) transmute the separate property of either spouse to the parties’ community property, and (iii) transmute the separate property of one spouse to the separate property of the other spouse.
Transmutations must generally be in writing. The writing requirement does not apply, however, to most gifts between spouses of clothing, wearing apparel, jewelry or other tangible articles of a personal nature.
Property Held Or Transferred In Trust
Generally, separate property that is held in or transferred to a revocable trust remains separate property.
Similarly, community property that is held in or transferred to a revocable trust generally remains community property.
Relationship Between Marital Agreements And Estate Planning Documents
Marital agreements are contracts entered into between married persons primarily for the purpose of defining, clarifying, and/or changing the character of the parties’ property. In contrast, most estate planning documents are designed primarily to streamline the disposition of property in the event of death and to minimize death-related expenses such as taxes and professional fees.
Marital agreements can help ensure that the objectives of a married person’s estate planning documents are actually realized. This can happen in two ways:
- First, a married person can at death only direct the disposition of his or her separate property and his or her half interest in the parties’ community property. A marital agreement that clearly defines separate and community property can aid in the determination of whether a spouse has attempted to make a disposition that is beyond his or her legal ability.
- Second, an estate plan that directs the disposition of property based on its character can be more easily and predictably implemented if the character of the underlying property is clear. For example, it would be important to know if a specific piece of real estate or brokerage account is community property or separate property in carrying out the terms of an estate plan that provides for all community property to pass to the surviving spouse and all separate property to pass to the parties’ children.
Recommended Next Steps
For the reasons outlined above, it is advisable that married persons consult independent counsel regarding the pros and cons of entering into a marital agreement, or updating an existing marital agreement, as part of their legal and financial planning generally and of their estate planning in particular.