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The Significance of Separate and Community Property in California Estate Planning

California is a community-property state. This means that assets acquired during the course of a marriage are considered the equal property of both spouses. For estate planning purposes, one spouse may only dispose of his or her 50% share of community property by will or trust; the other 50% remains with the surviving spouse. Of course, one spouse may always leave his or her share of community property to the other.

Drafting Mistake Leads to Dispute Over Status of Marital Home

It is important when making your estate plan to clearly delineate between community and separate property. This is not always a simple matter, especially if one or both spouses have remarried and retain separate property from prior relationships. While California law allows couples to freely decide whether to convert property’s status from separate to community and vice-versa, a process known as “transmutation,”it is important that a will or trust is consistent on this point.

Here is an example of what can happen when it is not: This recent case from San Mateo County presented here merely as an illustration and should not be construed as a complete statement of California law.

This case involves a man (the decedent) who passed away in 2009. At the time of his death, the decedent was married to his third wife. The couple married 22 years earlier, in 1987.

A year after the marriage, the decedent created a living trust. He transferred his home–acquired during his second marriage–into the trust as his sole property. Six years later, in 1994, the decedent and his wife signed an amended trust transmuting all of their separate property into community property (while keeping it in the trust).

The decedent and his wife also signed a “side agreement” that declared the decedent’s house would remain his separate property. This was done on the advice of counsel for tax planning purposes. Several years later, the decedent decided to abandon this plan and literally “tore up” the side agreement in the presence of his attorney.

However, due to a drafting mistake, language in the trust itself that referred to the side agreement was never removed. This created a legal controversy after the decedent died. Under the trust, the wife, as surviving spouse, was entitled to the decedent’s community property. But under the side agreement, the house was still considered separate property and had to go to other named beneficiaries of the trust.

This was not an insignificant matter. If the house was no longer community property, the wife would lose her interest in the property, which was valued at over $3 million. She would also face a seven-figure tax penalty.

The decedent’s longtime estate planning attorney filed a written declaration with the probate court. He explained that his client always intended to transmute all of his property, including the house, into community property. The side agreement had not been valid since the decedent destroyed it in his presence.

The California First District Court of Appeal, overruling a probate judge’s earlier ruling, found the attorney’s testimony and other evidence persuasive. The First District said that the decedent’s clear intent was to give his current spouse a community property interest in the house. Unfortunately for the spouse, additional legal complications compelled the First District to return the case to the probate court for further proceedings.

Building a Relationship With a San Diego Estate Planning Lawyer

Although a drafting mistake precipitated the controversy described above, it was the decedent’s long-term relationship with his California estate planning attorney that helped the court to understand the client’s wishes. If you need help in developing your own will or trust and need experienced counsel, contact the Law Office of Scott C. Soady today.

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