What community property means for your living trust, your taxes, and what happens in California when one spouse dies.
California is a community property state. Most states are not. The other community property states are Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you grew up in California, you have a basic sense of what that means. This post will give you a clearer picture of how community property actually affects your estate plan.
Community property is any asset acquired by either spouse during the marriage, regardless of whose name is on the account or the title. It belongs equally to both of you.
Your paycheck is community property. The house you bought together is community property. The retirement account you've been contributing to since you got married is community property, even though only your name is on it.
Separate property is different. Assets you owned before the marriage, gifts made to you alone, and inheritances you received are separate property, as long as you keep them separate. If you mix separate property with community funds, or add your spouse's name to a separate property account, you may have converted it to community property. That's called commingling, and it creates problems.
If you die without a living trust or a will, California's intestate succession laws take over.
For community property, the result is usually straightforward: your half goes to your surviving spouse. But separate property is different. If you have separate property and children, your spouse and your children split it under California's intestate rules. That may not be what you intended.
And don't assume community property automatically avoids court. If your assets are titled in your name alone, your half may still require a spousal property petition filed with the probate court. It's a simpler process than full probate, but it still involves a judge. A living trust avoids the court entirely. And in some cases, a spousal property petition is not an option, and you will need to go through probate.
This is one of the most valuable benefits of living in a community property state, and most people don't know about it.
Start with a definition. Your tax basis in an asset is what you paid for it. When you sell, your capital gain is the sale price minus the basis. If you bought a home for $400,000 and sell it for $1,000,000 net, your capital gain is $600,000. The federal capital gains tax is roughly 15%. California's is 9.3% to 13.3%. That's real money.
Note: Internal Revenue Code Section 121 lets you exclude up to $250,000 in gains on a primary residence if you're single, and $500,000 if you're married. But if your home has appreciated well beyond that, the exclusion only goes so far.
Here's where community property makes a dramatic difference.
When the first spouse dies in California, the entire community property estate gets a full step-up in tax basis to the date-of-death value. Not just the deceased spouse's half. All of it.
A couple bought their home for $400,000. When the husband died, the home was worth $1,200,000. Under California's community property rules, the wife's tax basis in the home steps up to $1,200,000. If she sells it for $1,200,000 and nets $1,100,000 after commissions and costs, her capital gain is zero. In fact, she has a loss on paper.
In a non-community property state, only the deceased spouse's half gets the step-up. The wife would end up with a blended basis of $800,000: his half stepped up to $600,000, her half still at $200,000. Capital gain on the same sale: $300,000.
California's community property rules can eliminate capital gains on decades of appreciation at the first death. And when the surviving spouse eventually dies, the heirs get another step-up on whatever the property is worth then. It's one of the most powerful wealth-transfer tools in California estate planning, and it's built into state law.
Two situations come up most often.
The first is an A/B trust, also called a bypass trust. These were standard in almost every living trust drafted before 2011. When the first spouse died, the trust automatically split, with half the assets going into an irrevocable bypass trust. Assets locked in that bypass trust don't get a second step-up when the surviving spouse dies. If you have an older trust with an A/B structure, this is worth a serious look. We wrote an entire post on it: Your Bypass Trust Is Probably Hurting Your Kids.
The second is gifting assets to your kids outright or through an irrevocable trust during your lifetime. Certain gift strategies and asset protection structures can lock in the current basis and prevent the step-up. This is especially an issue with real properties. If you are considering gifting a property to your children, you need to talk to your estate planning attorney and accountant.
Yes. Community property status does not avoid probate.
If you die and your assets are titled in your name alone, your half of the community property may still require a court proceeding, even if your spouse is alive and you wanted them to have everything. A living trust avoids court entirely. Your successor trustee transfers assets to your beneficiaries privately, without a judge, and on your timeline.
If you already have a living trust, make sure it's properly funded. Community property still titled in individual names, and not transferred into the trust, may end up in a court proceeding regardless of what the trust document says.
A well-drafted California living trust for a married couple addresses community property directly. Assets go into the trust with their character intact. Community property stays community property. Separate property stays separate property.
If one or both spouses brought significant separate property into the marriage, or if either spouse has children from a prior relationship, community property rules get more complicated.
A spouse with children from a prior marriage may want to ensure that their half of the community property, and their separate property, goes to their own children and not to a surviving spouse who then leaves everything to her children. That's a legitimate concern and a common one. Without intentional planning, it can happen.
Standard estate planning documents are not adequate for blended families. You need a plan designed specifically for your situation. We've written about this in detail: Estate Planning for Blended Families and Second Marriages in California.
Your 401(k) or IRA is almost certainly community property if you were contributing to it during the marriage, even though it's in your name alone. Your spouse has a legal ownership interest in it.
Federal law generally requires that a spouse be named as the primary beneficiary of a 401(k) unless the spouse signs a written waiver. IRA rules are slightly different, but California's community property interest still applies.
The practical point: make sure your retirement account beneficiary designations are coordinated with your overall estate plan. A mismatch between your trust and your beneficiary designations is one of the most common and expensive mistakes we see. Your trust may say one thing. Your 401(k) form may say something completely different. The beneficiary form wins.
For more on this, see our post on estate planning for married couples with larger estates.
If you lived in a non-community property state during part of your marriage and then moved to California, you may have quasi-community property. That's property acquired in another state that would have been community property if you'd been in California at the time. California treats quasi-community property like community property for most estate planning purposes, but the rules are technical. The reverse applies if you move out of California after building up community property here. Different states treat it differently.
California couples outside our immediate area often assume they need to drive to an estate planning office. They don't.
We work with clients throughout California over Zoom. The entire process, from the first conversation through document review to the signing appointment, happens virtually. For couples in Los Angeles, the Bay Area, San Diego, Orange County, or anywhere else in the state, the process is identical to working with a local attorney. Same documents, same flat fee, same post-signing follow-up. But you don't have to leave your house.
Learn more about how virtual estate planning works and what it costs.
What is community property in California? Any asset acquired by either spouse during the marriage, regardless of whose name is on it. Each spouse owns exactly half. Separate property, which includes assets owned before marriage, gifts, and inheritances, is not community property as long as it's kept separate.
Does community property automatically go to my spouse when I die? Not necessarily. If your assets are titled in your name alone and you don't have a living trust, your half may still require a court proceeding. A living trust ensures your assets transfer to your spouse privately, without court involvement.
What is the step-up in basis and why does community property get a full step-up? A step-up in basis resets the tax basis of an asset to its fair market value at the date of death. In California, the entire community property asset gets the step-up when one spouse dies, not just the deceased spouse's half. This can eliminate capital gains taxes on decades of appreciation.
Can I leave my half of community property to someone other than my spouse? Yes. Each spouse can leave their half to anyone. If you have children from a prior relationship, a generic estate plan may not protect them. This is exactly the situation that requires careful planning.
Does a living trust change the community property character of our assets? It shouldn't, and a well-drafted trust will specifically confirm that assets retain their character going in. Community property stays community property.
Do we need separate trusts or can we have one joint trust? Most married California couples use a single joint living trust. Separate trusts make sense in some blended family situations or when one spouse has significant separate property that needs to stay separate.
Is virtual estate planning legally valid in California? Yes. We use a licensed remote online notary for signing appointments, and the documents are fully valid under California law.
What does it cost to set up a California living trust estate plan? We charge fixed fees and publish our prices. I've also written an article on this: How Much Does a Living Trust Cost.
We work with married couples throughout California. Our fee for most couples is $4,000. Flat fee. No hourly billing. Questions after signing are always free.
We serve clients from our El Dorado Hills, Roseville, San Diego, and San Luis Obispo offices, and virtually from anywhere in California.
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