With certain exceptions all property, including real property or personal property, regardless of its location that is acquired by a married person during the marriage while living in California is community property. Married persons share equal interests in community property and exercise equal rights with respect to management and control of the community property. The separate property of the married person includes all property owned before the marriage, or acquired after the marriage by gift, bequest, devise, or descent. Additionally, the rents, issues, and profits on a spouses separate property are also separate property of that spouse. A married person may, without consent of their spouse, dispose of their separate property.
In analyzing any marital estate, be it for estate and tax planning, premarital planning or incident to a legal separation or dissolution, the assets of the parties need to be characterized as either community or separate. The general rules, as stated above, are referred to as presumptions and will determine the characterization of the property by time of acquisition. There are, however, other methods of determining the character of property that could overcome the presumption of characterization based upon time of acquisition. Regardless of time of acquisition, husband and wife are allowed to change the character of the property i.e., making community property the separate property of ones spouse, making a spouses separate property community property, or making one spouses property the separate property of the other spouse. Such changes in the character of the property is referred to as transmutation.
Any transmutation or attempted transmutation of property is subject to limitation imposed by the fiduciary duty each spouse owes to other. In requiring the highest degree of good faith and fair dealings between the spouses, any attempt to change community property to the separate property of one spouse is subject to a presumption of undue influence. Additionally, any attempt to transmutate property made on or after January 1, 1985 requires the transfer be in writing unless the property is a gift between spouses of clothing, wearing apparel, jewelry or other tangible articles of a personal nature used solely or principally by the spouse receiving the gift and that the gift is not substantial in value taking into account the circumstances of the marriage. The writing must be signed by the spouse giving up their interest and must expressly state the characterization or ownership of the property being changed.
Also, community funds to improve separate property absent a contrary agreement will take on the character of the separate property. Depending upon whether the funds were deemed a gift, the community may have a claim for reimbursement. If spouse A uses community funds to improve spouse B’s separate property it is presumed a gift, however, if the community property is used to reduce loans against the separate property, the community acquires an interest in the separate property. If spouse A uses community funds to improve spouse A’s separate property no gift is presumed and the community has a right to reimbursement. The commingling of separate and community property does not change the character of the property provided the community and separate property interest can be identified. Conversely, when the separate and community property have been commingled so that the respective interests cannot be traced and identified, the entire fund is treated as community property
The characterization of property as separate or community is subject to complex rules and technical requirements with respect to maintenance and accounting as well as fiduciary duties relating to management and control.
Obviously, care should be taken in the management and control of assets in a marriage. Husband and wife should have an understanding as to what their marital estate includes and does not include so that they can understand the consequences of their actions.