For married couples in California, knowing how property is classified will shape nearly every part of an estate plan. The distinction between community and separate property determines what happens to assets during divorce or after death, which is why many couples consider signing a community property agreement within their estate plan.
A Community Property Agreement determines whether assets acquired during marriage are treated as shared or separate, directly influencing what happens to them upon death or divorce. Before signing one, it’s worth understanding how it could reshape your estate plan and future financial security.
What is a Community Property Agreement?
Community Property Agreements are legal documents used in states like California that allow married couples to modify how their property is classified under the law. By default, California law treats almost all property gained during marriage as community property. This means both spouses share equal ownership (regardless of who is on title), and the surviving spouse generally inherits the entire share upon death (often referred to as the right of survivorship).
When couples sign a Community Property Agreement, they agree to change this default rule. Depending on the language, the agreement can confirm that certain assets will remain separate even if acquired during marriage. In order to convert community property into separate property, however, you would typically use a postnuptial agreement to accomplish that goal. This type of agreement does not supersede a prenuptial or postnuptial contract regarding converting community property to separate property, but can convert separate property to community property.
How a Community Property Agreement Supports Your Estate Plan
Earlier, we explained how Community Property Agreements can override certain default rules for dividing assets. From an estate planning perspective, this can be a useful tool for couples who want more control over how their property is taxed and distributed, and how their assets are protected. For example, someone with children from a prior relationship may want their separate property to pass to those children rather than to a surviving spouse.
Additionally, Community Property Agreements can provide clarity during the probate process upon death, simplifying what can be a stressful and complicated experience for those mourning the loss of a loved one.
The Risks of Including a Community Property Agreement in Your Estate Plan
While Community Property Agreements can provide benefits, they also create potential challenges, especially in the event of divorce. A signed agreement can affect which property is included in the division that takes place post-divorce, meaning that you would be acquiring the value of the asset regardless of how or for how much it was acquired. Because of this, you have to be aware of the potential tax consequences of acquiring or maintaining ownership of a certain asset.
Community property assets typically receive a full “step-up in basis” when one spouse dies or the asset changes hands during divorce, meaning the tax basis of the property is adjusted to its current market value. This reduces capital gains taxes if the surviving spouse sells the property later. If a Community Property Agreement converts separate property into community property, only half of the property may receive the step-up. As explained in our previous blog on the step-up basis, this can result in a larger tax bill when selling the asset because the original purchase value remains in place for the portion not stepped up.
Making the Right Choices to Protect Your Estate
Decisions about community property agreements should be made with a full understanding of how they affect your estate plan and potential tax obligations. Couples who sign these agreements without reviewing their estate planning documents may unintentionally create gaps or leave assets vulnerable. Coordinating these documents ensures your wishes are carried out and avoids surprises for surviving spouses or children.
Dahl Law Group helps California families align estate plans with marital agreements to safeguard both property and legacy. Contact our team today to make sure your estate and your assets are in the right hands.
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