Did you know that in California, any property acquired while married is considered Community Property? This means that, regardless of who bought it, the ownership is split 50/50 in the case of divorce. It also means that if you die without valid estate planning documents, your spouse automatically receives 100% of the ownership. If we’re talking about Separate Property, that’s a slightly different story, and of course, there are always exceptions to the rule. This episode of Absolute Trust Talk kicks off our Character Matters series, where we’re diving deep into the important distinctions between these two types of property and why you need to understand this for estate planning purposes. Let’s get started!
Time-stamped Show Notes:
0:00 Introduction
0:38 To start, we’re sharing the “celebrity situation” that inspired this new Character Matters series of discussions.
2:26 Before going too far, let’s clarify the basic definitions of our terms. Listen in to learn the key differences between Community Property and Separate Property.
4:35 While Community and Separate Property definitions are straightforward, some situations aren’t. Here’s a great example.
6:33 If you pass away without a valid will or trust, your Community Property automatically goes to your surviving spouse. But what about Separate Property? Here’s what you need to know.
8:38 Did you know you can get a higher tax exemption with Community Property than Separate Property?
10:29 We get asked a lot about the pros and cons of getting married, and even though finances and assets probably aren’t the main factors in determining your relationship, there may be some circumstances where they influence whether you should officially move forward.
Transcript:
Hello, and welcome everyone to Absolute Trust Talk. I’m Kirsten Howe, and Madison Gunn is here with me today. We don’t have a celebrity death to talk about today, unfortunately, or a celebrity estate plan. However, there is a celebrity – what would you call it – situation that we read about recently that inspired this episode. This is actually going to turn into a series of episodes that we are calling Character Matters. You can put the emphasis on either one of those words, and it still works. Madison, why don’t you talk about the celebrity situation? Then, we’ll get into our content.
Yeah, sure. I am a huge Housewives fan, guilty pleasure. One of my favorites that I’ve been watching from the beginning is Housewives of Beverly Hills. One of the longest-standing women on the show is Kyle Richards. She is from a famous family. She’s married into the Hiltons, was a child actress, and is still acting. Her husband, Mauricio Umansky, started a real estate firm shortly after they were married, and it has blown up into this huge company, which is actually called The Agency. I would say a huge agency, but it’s called The Agency” – good marketing! – and they are currently separated.
And there’s a lot of – no one’s bashing anybody in the news. It’s all very “keep the family together,” – but my thought process is that she was the wife while he was building this business for 30 years. That’s a lot of what we would call Good Will. And, you know, obviously, the firm is him, right? He’s the face of it. He has all these agents under him, but he’s the owner and broker. And we were talking about what would happen if they do get divorced, if someone does file for divorce – you know, that might be his business, it might not have her name on it as an owner, I don’t think she’s a licensed real estate agent – and how that works.
We were talking about how, just because his name might be on it, she’s still entitled to half. Right, because she is a Housewife of Beverly Hills. They live in California; we are a Community Property state. That was the interesting story that brought us to “We’ve got to talk about Community Property and what that means, Separate Property and why do we as estate planners care so much about that?” I think first we’re going to start by just talking about what is Community Property, what is Separate Property – what the heck are we talking about?
There’s a lot of confusion, so we want to lay it out simply for everybody and go through that. Just as a basic concept, whether something is Community Property or Separate Property – that is its character. And that’s why we call this episode, or the series of episodes, Character Matters or Character Matters. Character means “Is it community or is it separate.” In this context, that’s what we’re talking about. The character is defined by the definition, not necessarily by any other action. We’ll talk about that more as well, but to start with, it’s handled by its definition.
Okay, so let’s go—Madison, kind of walk us through the definition of that. Reach back to law school! Everything is either Community or Separate. Community Property is anything you acquire from the date of marriage to the date of separation or death, whichever comes first.
Separate property is anything outside the marriage. Before the date of marriage or after the date of separation and anything during marriage that is inherited – you inherit it by yourself – it is gifted to you –not to you and your spouse, but to you. Those are exceptions. Are there other exceptions that I am missing? Yeah, okay, just gifts and inheritance. So that is Separate Property. And then, technically, Separate Property is something that should stay separate. Community property has both of your names on it.
It’s also important to remember that if something is separate, its income, growth, and appreciation are also separate. The same is true for the Community. If something is Community and generates income, that income is Community Property.
There is something called what we call a Community Property Interest. That means if you have Separate Property, let’s say it’s a house, because this is the number one example we experience, right? I inherited this house, and then ten years later, I got married, but it’s still my Separate Property. Only my name’s on it; my spouse isn’t on it. That’s separate; she can’t get it, right?
Maybe. The problem is, were you using Separate Property to pay all the expenses on this house? Or were you using your income during marriage to pay down the mortgage, pay the property taxes, or put a new roof on? You know, capital improvements, things like that. Are you using her income to do that, or is she putting any money towards the house? That doesn’t necessarily mean that it’s now a 50/50 asset. That’s not what we mean. You’re not changing the character; it is still a Separate Property. But when you go through a divorce, typically, there is a balance sheet, and you move money from column to column. The spouse might have acquired a right regarding that. If there’s been $100,000 of Community – I’m not going to pretend to talk about, you know, growth or interest or anything like that – but let’s say $100,000 of community money was put towards the Separate Property asset, the other spouse might be entitled to $50,000 in their column, on their ledger.
Okay, so you just talked about divorce. That’s the easy, obvious example of why one of our clients should care about understanding what’s Community and what’s Separate because if you get divorced, that will all have to get fleshed out. It’s important to know from that standpoint, but there are other reasons clients need to understand what’s Separate and Community.
The big thing would be when somebody dies – which is what we’re in the business of, not typically in the business of divorce – if somebody dies and they don’t have an estate plan, there are intestacy laws. We talk about that. There is a plan for your assets if you die. If you don’t have a plan, the law has a plan. But that plan is different for Community Property than for Separate Property.
When you die, your Community Property goes a hundred percent to the surviving spouse. If you don’t have a written plan that says otherwise. Right, you have no documents when you die. Your Community Property generally goes a hundred percent to the surviving spouse.
Your Separate Property is going to depend on whether or not you have children or if you or siblings. It goes out to siblings. If you die and you have a child, half of your Separate Property goes to your child, and the other half goes to your spouse. If you have two children or two children or more, I should say, your children get two-thirds, and your spouse gets one-third of the Separate Property. Right. And if you don’t have kids, I believe, and you have siblings, then they get half or a third – or parents. Or parents, yeah. It only goes that far. You only go out that far. And then it would all go to the spouse if there aren’t any more close relatives. It’s not going to go to your first cousins. Right. Right.
But the important point is that that probably isn’t, in many cases, what the decedent would have wanted – for spouse and children to co-own the house that the spouse lives in. That’s usually not a good result, especially if it’s not that spouse’s child. Most especially, yes. It’s very important to understand that just because you’re married, that doesn’t mean the estate plan is going to work the way – or the California probate code estate plan – will work the way you think it will. That’s an important point. But there are other reasons, too.
Yeah, there are benefits, or not benefits, depending on how you look at it, but there are things to weigh. Anything that is Separate Property is treated differently than Community Property when it comes to taxes. Your primary residence, you know, we all get a capital gains exemption for living in your home. You get a $250,000 per spouse exemption. If you’re not married, you only get the $250,000. If you’re married and both on title, you get $500,000. If your spouse doesn’t own the property because you’ve kept it separate, you only get the $250,000 exemption. Just because you’re married doesn’t mean you get that exemption automatically. Yeah, only the owners get it. Right.
And the other thing, so that’s exemption from capital gain upon the sale of the house, and the other important point from our client’s perspective is the treatment of the capital gain on death. The person who owns Separate Property when they die, their Separate Property gets a new stepped-up tax basis. The stepped-up tax basis is good. It’s always good. We always want that. So, you get that on everything that you own when you die.
But if it’s your spouse who owns the Separate Property and they die, that’s great, but if you die and it’s not your Separate Property, it’s your spouse’s Separate Property, and it’s not going to get a stepped-up basis. We talk to clients about these things when they’re trying to sort through it.
It’s not uncommon for clients to say, “What are the pros and cons of getting married?” And these are the things that we walk through, although we certainly don’t think that finances should be played a part in why you’re getting – or whether or not to get married, but they might play a part in that decision, especially if you’re talking about a silver marriage and it’s your second or third marriage. At that point, do you need to get married with some people? Yeah, you want to know what all the advantages and all the disadvantages are because you probably already know what a lot of the disadvantages are. Right. When you go to your attorney, are there any tax reasons why I might want to consider getting married even though I know. Speaking as a jaded divorced woman, sorry.
In our next episode in this series, we’ll explore what Community versus Separate means in estate planning. We’re very glad you were here today. I hope you learned something, and we look forward to connecting with you again.
Resources Related to This Episode:
- Absolute Trust Talk Episode 107: What Are Commonly Overlooked Money Issues When Splitting Assets in a Divorce?: https://absolutetrustcounsel.com/107-what-are-commonly-overlooked-money-issues-when-splitting-assets-in-a-divorce/
- Absolute Trust Talk Episode 105: AB Trusts: Do You Have One? If So, Do You Still Need One?: https://absolutetrustcounsel.com/105-ab-trusts-do-you-have-one-if-so-do-you-still-need-one/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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