Individuals in California are fortunate to live in a state with a dynamic and robust business environment. Many people in the state are able to develop a long and profitable career during which they are able to buy a home, make investments into various accounts, and accumulate significant wealth. Most Californians who have found success in the state want to protect what they have worked for. Protecting one’s assets requires both short-run and long-term planning.

However, to be effective, estate planning must be tailored to the laws of the state. In California, this means that any estate plan must be designed in contemplation of California’s community property regime. A failure to understand and apply this fact can result in an ineffective plan or a plan that produces unexpected and undesired results.

The accountants of the Cook CPA Group can help individuals in California protect their assets during their lifetime. Furthermore, our accountants can assist with developing a plan that protects and supports your goals after you are gone. To schedule a free and confidential consultation, please call our accounting firm at 916-724-1665 or contact us online.

What Is Community Property?

Community property sounds like property that would belong to a community at-large. However, the name is somewhat misleading in this sense. Instead of referring to ownership of property society at-large, community property refers to the ownership of property by spouses. Property that is held jointly and equally by both spouses is considered community property. Property that is held individually by only one spouse is known as separate property.

What Rules Impact Whether Property is Community or Separate Property in California?

While there are general rules that can guide inquiries into whether property or an asset is community or separate property, it is important to recognize that there are some exceptions to these general rules. For instance, a married couple is free to make any agreement, such as a prenuptial agreement, that modifies the functioning of these general rules. In addition, special rules apply to inheritances and certain types of property.

However, the general rule is one that is fairly easy to follow. That is, the property that was obtained prior to a marriage is considered separate property. The assets and property that are obtained during the marriage are typically characterized as community property. A firm grasp of this concept is required to strategically develop an effective estate plan in California.

How Does Community Property Impact my Estate Planning Goals?

At the outset, it is important that an individual who is drafting an estate plan understands who owns what property. A general principle is that you cannot give away what you don’t own or distribute more than your ownership share. Therefore, an initial determination should include an inquiry to determine whether all conveyances are proper.

Furthermore, the community property regime can have a federal tax impact. If a minimum of one-half of the jointly held property is included in an estate plan, then federal tax law permits the inclusion of the full amount of community property to benefit from a stepped-up basis. However, one must weigh the risks of converting what would otherwise be community property to separate property. If the couple divorces, there is a greater risk that all or some of the property could be awarded to the other spouse.

estate planning

Cost basis is important because the basis is the acquisition cost of the property. The acquisition cost of the property is used when computing one’s capital gain and loss. A greater cost basis can reduce the capital gain realized and therefore result in reduced capital gain taxes when the gain is realized.

Work with Roseville-based Accountants Providing Estate Planning Services

If you are considering an estate plan to protect your assets, provide for loved ones after you have passed on, or to achieve other financial goals the accountants of the Cook CPA Group can help. To schedule a free and confidential initial estate planning consultation, please call 916-724-1665 or contact us online today.