Estate planning is complicated. California’s community property laws are complicated. It is easy to get confused because the rule is often contrary to what common sense indicates.
Generally, every penny you earn from labor during marriage is a shared penny. Assets you had before you married, inheritance and gifts you receive while married, and certain personal injury awards received during marriage are separate property.
Many believe that keeping their wages in a separate bank account means that they have separate property. Without a pre or post-nuptial agreement, they do not. Many believe that if they owned real estate before marriage that it remains theirs, even if they are using marital assets to pay down the mortgage. It is complicated.
Also important is understanding the effect of transferring an asset to a marital trust. A marital trust provides tax planning flexibility for a surviving spouse (if it is drafted properly) and avoids probate. It does not have any effect on the “characterization” of a property – how a court would allocate that asset in the event of divorce or a post-death dispute.
Common Misconceptions About Marital Trusts
Many believe that transferring an asset to a joint revocable trust magically transforms each asset transferred into a marital asset. This is incorrect. Transferring an asset to a trust avoids probate, maintains privacy, provides control from the grave over how those assets will be distributed, and may provide asset protection for beneficiaries of irrevocable trusts eventually created after a grantor’s (trust creator’s) death.
Transferring assets to a marital trust does not mean they automatically become marital assets.
Here is some of the language contained in my revocable trusts.
(A) Community Property
Any community property transferred to the trust will retain its character as community property during our lives, to the same extent as if it had not been transferred to the trust.
(B) Separate Property
Separate property transferred to the trust will retain its character as separate property. The separate property of either of us, including the property’s income and proceeds from the property’s sale or exchange, will remain separate property. Each of us has the unrestricted right to remove all or any part of our separate property at any time.
(C) Marital Property Agreement Controls
If we have entered into or in the future enter into a marital property agreement, the terms of that agreement will control the characterization of property titled in the name of the trust.
Sometimes, clients are happy to have one trust that disposes of both their separate and their community property. Some clients prefer to have separate share trusts for their separate assets and prefer to work with a different attorney so that they do not need to discuss their preferences for trustees and beneficiaries.