The Law of Community Property, Part 4

Tuesday, August 11, 2015 | 4:02 pm

As I discussed in previous articles in this series, community property is a unique form of property which can only be created when the property is acquired by a married couple or domestic partners during their union. However, how is community property treated under the laws of tax, probate, retirement and divorce?

Divorce law is probably the most commonly understood as it applies to community property. In the third article of this series I discussed what property would be characterized as community property. Almost everyone knows that upon a dissolution of marriage community property is subject, absent a contrary agreement of the parties, to an equal division. The difficult issue in divorce cases is the determination of what is community property. Once that determination is made the equal division is simple.

There are special considerations for community property under tax law. The most notable tax benefit of community property is that taxpayers who file a joint return may exclude up to $500,000 of the capital gain from the sale of a principal residence. This exclusion is twice that which an individual can exclude of $250,000 in capital gains. A further benefit of community property is that a surviving spouse receives a step up in basis for the entire value of any community asset upon the death of a spouse. These tax benefits only apply to domestic partners for their state income taxes since the federal government does not recognize domestic partners as married individuals.

Both private and governmental pension plans provide protection to the community property portions of the benefits. If a participant in the plan is married during the course of participation in the plan, any changes to the plan such as designation of beneficiaries or disbursements must be approved by the participant’s spouse or domestic partner. This approval is necessary because the benefits earned in the plan during the marriage are community property.

Finally, in probate proceedings community property has a special status. One can only dispose by will or other testamentary instrument one-half of the community property to someone other than their spouse or domestic partner. If one dies without a will, all of the community property passes to the surviving spouse or domestic partner.

Let me now invite you to ask questions about community property. Please email any questions to gwk@kearneybaker.com and look for the answers in upcoming articles.

Law Offices of Kearney Baker, 2 North Lake Avenue, Suite 1000, Pasadena, (626) 844-7300 / (866) 859-1507 (Toll Free) or visit www.kearneybaker.com.

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