California's inheritance laws – and especially those related to community property – can get incredibly confusing quickly. When there is no valid will put into place by the deceased, or when the couple has high-value assets, the application of these laws can also become very intricate. A brief overview of how inheritance relates to both community property and separate property by California is below.
Community Property Defined
Most states follow what is called common law for determining asset division during a marriage. Under common law, a spouse or domestic partner is not automatically granted the right to 50% ownership of all assets acquired during the marriage. Instead, ownership is determined based upon whose name an asset is purchased and whose income paid for it.
California joins only eight other states to adhere to community property law. These states recognize a policy that any property acquired during a couple's marriage or domestic partnership is considered joint property. Furthermore, each party has the benefit of a 50% stake in ownership automatically, regardless of whose name may be on the asset's title or whose income was used to pay for the asset.
Property that is considered community property includes bank accounts, stocks, bonds, cash, personal items, vehicles, household items, collectibles, and real estate holdings. These assets are split equally without regard to whose fault divorce may be or each spouse's financial situation. Even when one spouse brought in the entire income and assets of the marriage, they are still split equally. Likewise, any debt accumulated throughout the marriage becomes collective debt and is shared equally by both parties in the relationship.
Inheritance & Gifts in California
There is one exception to California's community property laws for assets received by either party in the relationship as a part of an inheritance or as a gift. These assets do not automatically go into the pool as community property. But the recipient should be wary that, under some circumstances, these assets can still be viewed as community property if they haven't implemented proper safeguards to protect the gift or inheritance.
Don't Comingle Assets
The best way to protect these assets is to prevent them from co-mingling with your other assets, those considered community properties. For instance, if you receive cash as part of an inheritance and deposit it into a shared account, it becomes impossible for the court to track what assets in the account are assigned to each party. All of it would be considered community property.
Whatever you receive as a part of inheritance should be treated separately and held in the recipient's name only to prevent it from being treated as community property.
Don't Use the Inheritance to Purchase Anything That Will Become Community Property
If you use inheritance to purchase something else while you are married, that asset will become community property. For instance, if you sell an inherited property and purchase a different property with the proceeds you receive from the sale, the new property will be considered community property. This legal treatment differs from the inherited property. If you keep the inherited property, it remains your asset alone and would not be considered community property during a divorce.
Consider a Legal Agreement
Prenuptial and postnuptial agreements are becoming increasingly common in marriages. These legal agreements can protect both spouses by clearly defining what both parties consider community property and individual property. Even in the absence of an agreement put into place before the marriage or domestic partnership, both parties may be open to considering it if there are substantial changes to their financial status as the relationship evolves.
Estate Planning and Inheritance
If there is a death in the family and no will to define beneficiaries, there are many different ways that a probate court may split assets. Further, if you do not have any surviving family, your estate may go to the state. There are many other scenarios in which California's inheritance laws can impact asset distribution in a way that the decedent may not have intended.
If you have questions about assigning, receiving, or protecting assets acquired through inheritance, it's best to speak with a reputable estate planning professional. These experts can walk you through all of the potential laws that may apply to your unique situation, including community property laws. They can also frequently provide a recommended course of action to achieve what you would like to achieve and provide peace of mind that your inheritance is protected.