Developing one or more revocable trusts for a married couple depends on the character of the property they own, i.e., all community property, some community and some separate property, or only separate property. In addition, the amount of community and separate property may also play a role in determining the most efficient structure for the couple.

All Community Property

Where a couple can appropriately characterize all of their assets as community property, estate planning lawyers typically create a single revocable trust for both spouses. Generally in this situation, a couples' wishes as to how the community property should be distributed after one and eventually both spouses pass away is fairly consistent. A single revocable trust is generally more cost effective as the estate planning lawyer only has one trust document to produce.

Some Community and Some Separate Property

Where a couple has some community property and some separate property, whether a single revocable trust or multiple revocable trusts is preferred may turn on the relative values of each type of property. If either or each spouse only has a relatively small amount of separate property, a single revocable trust with provisions taking into consideration the separate property may be appropriate, as the cost of creating a separate revocable trust to deal with one spouse's separate property may not be justified.

However, if one spouse owns a substantial amount of separate property, he or she may wish to create a separate revocable trust to hold those assets and prevent the likelihood of commingling those separate assets with community assets, which would be held in a community property trust. It can also help with housekeeping to ensure that both spouses have clarity on which assets are community and which are separate.

Only Separate Property

If a couple has entered into an agreement where they agreed that there is no community property between them, for example, by virtue of a premarital or postnuptial agreement, then having separate trusts to hold each spouse's separate property will likely be the most sensible approach.

Although general guidelines can be prescribed, speaking with a qualified estate planning professional is an important step, especially for those who own substantial amounts of separate property. There may also be tax considerations that may cause you to re-characterize property as either separate or community property.

A spouse can transfer his or her separate property and 1/2 of community property and quasi-community property. Problems arise when a spouse tries to transfer more than 1/2 of the community and quasi-community property by a Will or otherwise.

Forced / Widow's Election

When a deceased spouse attempts to transfer by Will more than his or her 1/2 interest in community property, the transfer is voidable by the surviving spouse. Although rarely used nowadays, in situations where one spouse is particularly wealthy, he or she may utilize a strategy to specify in the Will that all of the community property is to be held in an irrevocable trust for the benefit of the surviving spouse during her lifetime. The Will may further provide that the surviving spouse can either agree to this arrangement, or make an election to enforce the surviving spouse's right in 1/2 of the community property and give up the right to the lifetime benefit of the deceased 1/2 interest in community property.  This is known as a "forced" or "widow's" election.

Aggregate vs Item Theory of Community Property

Sometimes the problem of transferring a specific item of community property may be handled by having spouses agree to using the  aggregate theory of community property. The aggregate theory of community property essentially is the idea that each spouse owns 1/2 of the community property by value rather than by item. Therefore, under the aggregate theory, a spouse may bequeath 1/2 of his or her assets without making mention of a specific asset. Under the item theory, a spouse only has the power to dispose of his or her 1/2 interest in any particular community property asset. California's default rule is to follow the item theory unless the spouses agree in writing otherwise.

Although the subject of a deceased spouse transferring a surviving spouse's interest in community property may be fairly infrequent, this concept highlights an important point. A person may not dispose of assets that he or she does not actually own.

California Family Code Section 760 defines community property as follows:

Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property. 

California Family Code Section 770 defines separate property as follows:

(a) Separate property of a married person includes all of the following:

(1) All property owned by the person before marriage.

(2) All property acquired by the person after marriage by gift, bequest, devise, or descent.

(3) The rents, issues, and profits of the property described in this section.

(b) A married person may, without the consent of the person’s spouse, convey the person’s separate property.

For purposes of death, California Probate Code Section 66 defines quasi-community property as follows:

“Quasi-community property” means the following property, other than community property as defined in Section 28:

(a) All personal property wherever situated, and all real property situated in this state, heretofore or hereafter acquired by a decedent while domiciled elsewhere that would have been the community property of the decedent and the surviving spouse if the decedent had been domiciled in this state at the time of its acquisition.

(b) All personal property wherever situated, and all real property situated in this state, heretofore or hereafter acquired in exchange for real or personal property, wherever situated, that would have been the community property of the decedent and the surviving spouse if the decedent had been domiciled in this state at the time the property so exchanged was acquired.

A married person or registered domestic partner has the authority to transfer his or her separate property and 1/2 of the community property and quasi-community property.

Such person's Will has no authority to distribute more than that person's interest in the community or quasi-community property. Often, married people or registered domestic partners don't carefully consider the appropriate separate or community property character of their assets and therefore fail to consider how their property will get distributed at the time of their death. Consulting with a trained estate planning lawyer will help to ensure that everyone is on the same page.

Transmutation is the process whereby spouses in California can change the community or separate property nature of the assets that they own. Thus for example:

1. The separate property of one spouse can be "transmuted" into the separate property of the other spouse or the community property of both spouses.
2. The community property of a couple can be "transmuted" into the separate property of one of the spouses.

Some Reasons for Transmutation

Here are some ways that transmutation can be used to a couples benefit:

1. Transmuting property into community property may allow a full step-up in cost basis of the asset upon one spouse's death. This may allow the surviving spouse to sell the property with no or substantially less capital gains tax.
2. For Medi-Cal planning purposes, transmuting the family home may provide a family substantial savings.
3. Properly written transmutation agreements can reduce the likelihood of litigation regarding the character of property after the death of either or both spouses.
4. Transmuting property allows parties to have legal title to assets that properly reflect their true beliefs about the character of the property. For example, only one spouse may have taken title to a home in order to receive favorable financing rates even though it was the clear intention of the couple that the home be their community property.

Applicable to Divorce

Keep in mind that transmutation agreements also affect the division of assets for purposes of divorce. Thus, it is always important to understand the ramifications of how your assets are characterized.