Spousal liability for debts and planning opportunities

California is a community property state. Ownership interests of married persons are categorized as either the couple’s joint community property or as either spouse’s own separate property. Assets acquired while married and living together in California are presumed to be community property assets and assets acquired prior to marriage and as gifts during marriage are separate property, unless commingled or transmuted.

Let us discuss the liability of a married person for their spouse’s debts while both are alive and then after when one spouse dies.

While both spouses are living, community property assets are generally liable for the debts of either spouse incurred before or during marriage (Family Code sections 900 et. seq.). This is true even if only one spouse is party to the debt or to the judgment (Family Code section 910(a)).

Two important exceptions exist: First, if a married person puts his or her earnings earned during marriage (i.e., community property) into a separate bank account that their spouse cannot access then these deposited earnings are not liable for the spouse’s debts incurred prior to marriage; and second, the debts of a deceased spouse’s last illness and funeral are chargeable against the deceased spouse’s own estate, i.e., the deceased spouse’s separate property and onehalf of the community property estate.

Conversely, a married person’s separate property is not answerable for their spouse’s own premarital debts or for any marital debts allocated by court order, either at divorce or at death, to their spouse. Thus, a married person who does not commingle their own separate property can protect it from their spouse’s own creditors.

Next, when one spouse dies the surviving spouse is generally liable for the deceased spouse’s debts. The surviving spouse’s liability, however, is limited to the total fair market value, at date of death, of the couple’s community property assets (less any encumbrances — i.e., secured debts) plus any of decedent’s separate property assets (less encumbrances) that are received by the surviving spouse outside of probate. The fair market value of any joint tenancy assets received by the surviving spouse are also included.

However, a surviving spouse may avoid such liability for their deceased spouse’s debts by placing both halves of the couple’s community property and all of the decedent’s separate property into a probate for the decedent’s creditors to file their claims.

Whether the surviving spouse does so depends on circumstances. That is, consider a surviving spouse who is the sole surviving owner on the couple’s valuable joint tenancy home. Nonetheless, the surviving spouse may not be the sole beneficiary of the decedent’s probate estate and may have to share the probate assets with the decedent’s children. Accordingly, probating the joint tenancy assets may not work so well for the surviving spouse. Nonetheless, a surviving spouse is more likely to probate all community property assets and the decedent’s separate property if the decedent’s debts exceed the current value of all such assets.

In a probate court proceeding, as in divorce court proceedings, debts can be allocated between the surviving spouse and the estate of the deceased spouse. That means categorizing debts as community property debts or as separate property debts of either spouse.

Debt acquired in pursuit of community goals (such as employment) are community property debts chargeable first against the couple’s community property assets and secondarily, if necessary, against the couple’s separate properties. Debts of either spouse from before marriage or in pursuit of either spouse’s separate goals (e.g., gambling debts) are separate property debts. Separate debts are chargeable first against that spouse’s own separate property assets and secondarily, if necessary, against the community property assets.

In sum, planning opportunities and pitfalls exist when entering into a marriage, when inheriting property (either before or while married), and at the death of a spouse. Anyone needing legal guidance on any issues discussed above should consult an attorney.