In California the name on the stock certificate does not settle it. What community property does to the owner's plan at death, to gifts of shares, to the buyout, and to the income tax basis.
An owner can only leave what the owner owns, and in California that is often half.
Most plans for a closely held company start from the stock ledger: one name, one owner, one person deciding where the shares go. California starts somewhere else. Family Code section 760 treats property acquired by a married person during the marriage, while domiciled in the state, as community property, and a company founded and grown in those years is acquired property. The certificate can carry one spouse's name while the company belongs to both.
That changes the first question. Before a plan decides who receives the company, it has to establish how much of the company the owner is able to give.
At death, the owner directs half. When a married Californian dies, one half of the community property already belongs to the surviving spouse, and the will or trust of the spouse who died governs only the other half. A plan that says the company goes to the daughter who runs it delivers her half the shares if the company is community property and the surviving spouse never signed the same plan. The usual answer is a joint trust both spouses sign. Family Code section 761 keeps community property community while it sits in a trust that is revocable during the marriage, so long as changing the rights in that property takes both spouses.
During life, a gift needs a signature. Section 1100(b) bars a spouse from giving away community personal property, or disposing of it for less than fair and reasonable value, without the written consent of the other spouse. Shares are personal property. An owner who moves stock to the children as annual gifts without that written consent has made transfers the other spouse can challenge. Section 1100(d) gives the spouse who runs a community business primary management and control, and that spouse may act alone, but must give prior written notice before a sale, lease, exchange or encumbrance of all or substantially all of the personal property used to operate it.
In the buyout, a missing signature is an open question. A buy-sell agreement signed by the owners alone leaves each spouse's community interest in the shares unaddressed. That is why a carefully drafted agreement carries a spousal consent: each spouse signs, acknowledging that the transfer restrictions and the price mechanism apply to whatever community interest exists.
The company that predates the marriage is the hard case. Section 770 keeps property owned before marriage separate, along with its rents, issues and profits. The owner's labor during the marriage belongs to the community, so growth is apportioned, and California courts use two approaches. Under Pereira v. Pereira (1909) 156 Cal. 1, the separate estate receives a fair return on the capital it had at marriage and the rest of the growth is community, which fits a company that grew mainly because of the owner's work. Under Van Camp v. Van Camp (1921) 53 Cal.App. 17, the community receives the reasonable value of the owner's services, less what it already drew for family expenses, and the remainder stays separate, which fits a company that grew mainly on its capital or its market. The same books can produce very different numbers.
The tidy fix is to have one spouse sign the company over to the other, so a single person owns all of it and the plan reads cleanly. Section 852 allows that only by an express written declaration made, joined in, consented to or accepted by the spouse giving up the interest. A change of title or a verbal understanding does not do it.
It also has a price. Under Internal Revenue Code section 1014(b)(6), when one spouse dies owning community property, the surviving spouse's half takes a new income tax basis, generally its value at the date of death, together with the half that belonged to the spouse who died, as long as at least half of the community interest was included in that spouse's gross estate. Turn the company into one spouse's separate property and that treatment is gone. If the other spouse dies first, nothing is adjusted, and a later sale of low basis founder stock carries the full gain.
Characterization has limits as a planning tool. Apportionment depends on records from the date of marriage that many families no longer have, and where they are missing the answer is an informed estimate, not a figure. What a plan can do is settle the question in writing while both spouses are alive and able to agree.
None of this replaces the rest of Estate Planning for a Family Business. It decides how much of the company that planning has to work with.
General information about California and federal law, not legal advice, and no attorney-client relationship is created. How these rules apply depends on your dates, your documents and how the company was funded.
Bring the stock ledger, the date of marriage and any marital agreement. We will tell you what the plan can reach.
