Community Property - Part Two - Challenges

Community property is a fascinating subject for folks like me (or maybe JUST me!). It has far-reaching implications that few folks - regardless of sexual orientation - ever consider. Where we see it creep up frequently is in business partnerships and ventures. Any partnership agreement, particularly a partnership agreement that provides various options for selling or releasing a partnership interest, should be sure that all spouses of the partners sign also. Plenty of attorneys can tell stories about business partners who found themselves stuck with the spouse of their partner, whom they tolerated at holiday gatherings, but otherwise couldn't stand, suddenly inserting themselves into the day-to-day operations at the death of the spouse who was the intended partner. Then try and imagine the fun of running operations after your partner divorces his or her spouse, but that person retains an ownership interest by virtue of the community property interest in the business.

But I digress.

Community property law will provide some interesting challenges in the future by virtue of the principal with which I started this article: the federal government generally defers to the states in the characterization of property. But, the laws that the federal government enacted to create parity between the community property states and the "common law" states (see below) only applied to married couples. Which the Defense of Marriage Act explicitly states that for the purposes of federal law means a man and a woman.

I mentioned that there were currently nine states who have community property systems in place (with Alaska offering an opt-in program). However, that wasn't always the case. Before the Revenue Act of 1948 was passed, married couples living in community property states had a distinct advantage over married couples in the remaining states (referred to as "common law" states). Our income tax system is a progressive system, where the tax rate changes as your income grows. In community property states, each individual had a 50% interest in the money that was earned. So the husband and wife separately had income equal to half of the overall income earned. This was of an advantage for those families, as was often the case, where there was only one bread-winner. In a community property state, a husband earning $20,000 a year with a wife who had no earnings, would only be taxed at a rate applicable to $10,000. His wife would also be taxed on $10,000. While in a common law state, a husband earning $20,000 a year with a wife who had no earnings would be taxed at the rate applicable to $20,000. There were additional tax issues raised with gifts and distributions of ones estate at death.

In response to this disparity, six "common law" states actually adopted community property systems between 1945 and 1947. But this caused significant chaos in characterizing property for those married before the systems took effect. And so, the Revenue Act of 1948 introduced the joint tax return, and provided for a marital deduction for gifts and transfers at death between individuals who were married to each other.

I predict that we will encounter similar confusion as a result of California's actions both for registered domestic partners and for those of us who entered into same sex marriages. It will be interesting to see how it all sorts out.

Community Property - Part One - What is Community Property?

I believe that I have mentioned this point before. The federal government, generally, defers to states in determining the "character" of property. "Character" is typically a term of art surrounding descriptions of ownership.

"Community property" is a term used to describe marital property. Not all states use the term "community property". In fact, there are only nine states in the U.S. currently that have community property systems as the standard marital property system, with Alaska allowing for couples to opt-in to a community property system. (For those of you who are wondering, the nine states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin).

I admit that I am a geek - and for some strange reason, I find the subject of community property to be very interesting.

California Family Code Section 760 defines community property as such: "Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property."

Mind you the real tricky part of that definition is "[e]xcept as otherwise provided by statute"!

Generally, all property acquired after marriage is presumed to be community property. The major exception to this presumption is that gifts or inheritances received during marriage, if given solely to one spouse, are presumed to be the separate property of that spouse.

Why do I care whether property is "community" or "separate"?

This determination of whether the property is "community" or "separate" provides significant rights regarding ownership and management of the property. Family Code Section 751 states: "The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing, and equal interests."

English, please?

Ignoring for the moment that the section is using terms of "husband and wife" (or at least, I'm trying to), what this section states is that the interest in property that is deemed to be community property during the marriage (and during the domestic partnership) are "present, existing, and equal". What this means is that at the moment the money is earned during marriage, both parties have an immediate and equal property interest in the community property. Not simply a future interest at death or divorce, but an immediate 50% interest in the property as soon as it is earned.

Now there are special rules for the distribution of community property when the community ends. What happens depends upon whether the community ends because of divorce or death. For purposes of this blog, we'll focus on what happens at death.

At death, the surviving spouse retains an interest in the community property. If the spouse dies intestate (without a will), the probate code dictates that the surviving spouse receives 100% of the community property. If the spouse dies with a will or a trust, the deceased spouse does NOT have the power to give away by such device the full value of the community property - only his or her share of the community property. If the deceased spouse tries to give away more, the surviving spouse has rights to elect to receive her share of the community property.

"Community Property", "Marital Property" were terms that gay couples (other than those of us who were going to law school) had little reason to know before 2005. The terms didn't apply to our relationships. The California legislature changed that effective in 2005. In 2005, newly registered domestic partners were subject to community property laws, and previously registered domestic partners had to proactively opt out to prevent this property system from being applied to their relationships.

See my next post for a brief discussion on the issues raised by community property.

Help Me!

Hello fellow readers:

Thank you for visiting my blog. I hope you find something useful here for you. I would love some feedback - please let me know what articles you found of value, and what questions you might have. I believe the blog is set up to receive comments, or you can e-mail me directly at karin@kbaker-law.com.

I am looking for topics, too. A financial advisor colleague made a comment to me recently that one of his goals in educating the gay community is to show them that estate planning isn't so different for gay folks as for 'straight' folks (my words, not his). His point was not to discredit some of the special issues that the glbt community must consider, but instead to highlight that the tools available to the gay community are the same as those available to the gay community.

We spend a lot of time looking at differences sometimes - no matter where we sit - that it is true that we sometimes overlook the similarities. I think there is a middle ground, and I hope that this blog may reflect both the similarities and highlight the differences.

I recognize when considering this blog and my approach, that it is easy to assume that there is a basic understanding of estate planning, and to then go to the next plane and address the differences. I realize that it might be useful, too, to elaborate on estate planning tools in general, as well. So some of the upcoming entries will discuss a variety of estate planning issues.

Again, please send feedback. Like all bloggers, I like to know that someone is reading by more than just the stat counter. All that tells me is you hit the page, not that you made it to the end of this entry. Let me know what you want to know more about.

Thanks!