California is one of nine community property states in the United States. This single fact has more influence on how estate planning works in California than almost anything else. It affects how assets are owned during marriage, how they are taxed at death, how a living trust is structured, and what happens to property when one spouse dies. Understanding community property is not optional for California couples doing estate planning — it is foundational.
What is community property?
Community property is a system of marital property ownership under which most assets acquired during marriage are owned equally by both spouses — fifty percent each — regardless of whose name is on the account, whose paycheck funded the purchase, or who managed the asset day to day.
California's community property rules are found in the California Family Code. The basic principle is straightforward: income earned during marriage and assets purchased with that income are community property. Each spouse owns an undivided one-half interest.
What is community property?
Assets that are generally community property in California:
- Wages, salaries, and self-employment income earned by either spouse during marriage
- Real estate purchased with community funds during marriage
- Bank accounts funded with community income
- Investment accounts funded with community income
- Retirement account contributions made during marriage
- Business interests built during marriage using community labor or funds
What is separate property?
Assets that are generally separate property in California:
- Property owned by either spouse before marriage
- Gifts received by one spouse during marriage
- Inheritances received by one spouse during marriage — even during the marriage
- Property purchased entirely with separate funds and kept separate
- Proceeds from the sale of separate property, if traceable
The complication — commingling
Separate property can become community property — or partially community property — through commingling. If you owned a house before marriage and used community income to pay the mortgage during the marriage the house may have both a separate property component and a community property component. Tracing commingled assets is one of the most complex areas of California family and estate law.
Why community property matters for a living trust
When a California couple creates a living trust they need to decide how to hold their assets within the trust — and the community property character of each asset affects several important outcomes.
The stepped-up basis advantage
This is the most financially significant reason community property matters in estate planning. Under federal tax law assets receive a stepped-up basis at death — the cost basis of an inherited asset is reset to its fair market value at the date of death, eliminating any capital gains tax on appreciation during the decedent's lifetime.
For community property the stepped-up basis applies to both spouses' halves of the asset when the first spouse dies — not just the deceased spouse's half.
Example: A couple bought a home for $400,000 during marriage. It is worth $1,200,000 when the first spouse dies. Because the home is community property both halves receive a stepped-up basis. The surviving spouse's basis in the home is now $1,200,000 — the full current value. If they sell it immediately after the first spouse's death there is zero capital gains tax on $800,000 of appreciation.
If the same home had been held as joint tenancy rather than community property only the deceased spouse's half would receive a stepped-up basis. The surviving spouse's half would retain the original $200,000 basis. The tax difference on eventual sale could be tens of thousands of dollars.
Preserving community property character in a trust
When community property is transferred into a revocable living trust it is critical that the community property character is preserved. If the transfer accidentally converts community property into separate property the couple loses the double stepped-up basis advantage described above.
A properly drafted California trust includes language explicitly stating that community property transferred into the trust retains its community property character. This is a drafting detail that matters enormously for tax purposes and is one reason the template quality of your trust documents is important.
How California couples typically structure their trusts
Joint revocable living trust
The most common structure for California married couples is a joint revocable living trust — a single trust that both spouses create together and that holds both community property and separate property assets. Both spouses are co-trustees and co-grantors during their lifetimes. Either spouse can typically amend or revoke the trust during their lifetime, though the mechanics vary by how the trust is drafted.
A joint trust works well for couples with primarily community property assets and a simple distribution plan — everything to the surviving spouse then to the children.
Separate trusts
Some California couples use separate trusts — each spouse creates their own trust holding their own separate property and their half of the community property. This structure is more complex to administer but can be appropriate in certain situations — significant separate property, prior marriages with children from prior relationships, or situations where the spouses want independent control over their respective shares.
Community property with right of survivorship
California allows married couples and registered domestic partners to hold property as community property with right of survivorship. This is a hybrid — it preserves community property tax treatment including the double stepped-up basis while also providing automatic survivorship rights like joint tenancy. It can be a useful option for couples who want a simple transfer mechanism for real estate without establishing a full trust.
What happens to community property when one spouse dies
Assets held in a joint trust
When the first spouse dies assets held in a properly structured joint trust typically continue to be held in trust for the surviving spouse's benefit. The trust may remain revocable or may split into separate components depending on how it was drafted. The surviving spouse typically continues as trustee.
Community property outside the trust
Community property not held in a trust passes according to California intestacy rules if there is no will or trust provision covering it. Under California law a surviving spouse inherits the deceased spouse's half of the community property. This means the surviving spouse ends up with 100% of community property assets — but the transfer still goes through probate if the assets are not in a trust.
Separate property
The deceased spouse's separate property passes according to their trust, their will, or California intestacy rules depending on what planning is in place. It does not automatically go to the surviving spouse.
Registered domestic partners
California law extends community property rules to registered domestic partners. Domestic partners have the same community property rights as married spouses under California law — including the same estate planning considerations. A joint trust is available to registered domestic partners on the same basis as married couples.
What to do if you have both community and separate property
Many California couples have a mix — community property from their years of marriage and separate property each brought in or inherited. A well-drafted trust should:
- Explicitly identify which assets are community property and which are separate
- Include language preserving the community property character of community assets transferred into the trust
- Address what happens to separate property at the first and second death
- Consider whether a schedule of community and separate property assets should be attached to the trust
This is one of the areas where the quality of your estate planning documents matters most. Generic templates that do not address California community property correctly can inadvertently convert community property to separate property, costing the surviving spouse the double stepped-up basis advantage. Logan's templates are drafted by California attorneys and Legacy plan members receive attorney review of every document.
Community property and beneficiary designations
Retirement accounts and life insurance pass through beneficiary designations outside the trust. But community property rules still apply to retirement accounts accumulated during marriage — even though the account is in one spouse's name, the other spouse may have a community property interest in it.
In California a spouse generally must consent in writing to naming anyone other than themselves as the primary beneficiary of a retirement account that was funded with community income during marriage. This is a common oversight in estate planning — updating a beneficiary designation without the required spousal consent. See our trust funding checklist for the steps to update beneficiary designations correctly, and our guide to asset inventory and trust funding for the broader funding workflow.