What are the Community Property States? And How Does it Works ?
In many states, spouses are joint owners of all assets, including property. However, specific conditions have recently eased this law through community property states by allowing partners to own property individually.
Divorces are grueling experiences, as assets division becomes a headache for partners. In community property laws, property is equally divided between partners. However, in an equitable distribution, states dictate the division by using a fair way method.
Therefore, understanding the property division laws is vital if you are planning or going through a divorce phase. Moreover, the word property includes not only physical properties but also financial assets and debts.
We will touch on all the critical aspects of community property states and their work in real life. So, stick around until the end to grab the essence of asset distribution laws.
Community Property Law
If you are residing in a community property estate, all assets acquired during the marriage are considered community assets; hence, they are divided equally between spouses. The law applies to every asset irrespective of whose name is on the investment. If the couples have decided to part ways, all assets will go as 50/50. Similarly, spouses are equally responsible for liabilities.
Contrarily, if one spouse dies, the share of the deceased goes to the surviving spouse unless advised otherwise through a valid will.
Community assets include the following.
- Income earned during marriage
- Savings and retirement accounts
- Real estate
- Personal property like furniture or cars
- Items purchased by either spouse during the marriage
List of Community Property States
In the U.S., nine states are using community property states. On the contrary, all other states use an equitable distribution mechanism in which assets are not divided equally.
The community property states include the following.
- Idaho
- Texas
- Nevada
- Arizona
- Wisconsin
- California
- Washington
- New Mexico
- Louisiana
Moreover, in Alaska, Florida, Kentucky, Tennessee, and South Dakota, the spouse has the option to opt for a community property system or nominate only certain assets as community property.
Likewise, California, Nevada, and Washington also bring domestic partnerships under community property law.
Community Property vs Common Property
Most states follow common property law. In common property law, the person whose name is mentioned on the document, such as title, registration, or deed, is the owner of the asset.
Therefore, under common property, spouses are not joint owners of underlying assets unless the names of both are written on documents. The law facilitates spouses to buy separate assets in their name, thus protecting them in a divorce. However, the court can still play its role and divide assets in a different proportion as it may deem fit. Likewise, liabilities and debts are also upon individuals under a common property.
Contrarily, community property equally divides assets and debts acquired under marriage.
Exceptions to Property Laws
There are always exceptions; similar is the case with property laws. Even in states observing community property, there are certain exemptions from the law.
The following are exceptions to property laws.
- Property acquired before marriage
- Property offered as gifts to one of the spouses
- Property acquired after divorce, or spouses are legally not living together
- Debts acquired before marriage
- Property received by a spouse through inheritance, trust fund, or a will
- Property that is protected by a prenuptial agreement
Moreover, separate property will become part of the community property if it is blended in a joint account—likewise, all those properties where ownership is changed to include another spouse in common ownership.
Marital vs Non-Marital Property
One of the most confusing points concerning community property is to differentiate between marital and non-marital assets and liabilities. For a spouse going through the separation phase, it is critical to understand the scope of assets acquired before, during, and after divorce.
Marital (community) covers the assets bought during the marriage, with a few exceptions, which are discussed in the coming lines.
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Separate Property Acquired Before Marriage
These cover all those assets and liabilities that a spouse had before getting married. If the spouse has some assets prior to marriage, it will remain solely their property and will not become part of the community property.
For instance, a couple got married on June 20, 2020. Prior to marriage, spouse A bought a car in his name. It falls under non-marital (asset) as spouse B was never in the picture at the time of the vehicle's purchase. In case of divorce, spouse B will not get any share of the car. However, the ownership of the vehicle should remain in the name of Spouse A.
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Separate Property Acquired During Marriage
No assets received as gifts or through inheritance fall under the community property category. For instance, spouse A receives a boat from his father as a gift; it will not become part of community assets.
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Separate property becomes Marital Property.
There are cases where a separately bought property can become marital property. For example, if spouse A has $25,000 before marriage but transfers funds to a mutual account or uses it to buy a home after the wedding, these funds become marital property.
Moreover, if an asset's value increases due to contribution by another partner after marriage (either monetarily or labor), the incremented value becomes part of the marital property.
Frequently Asked Questions
Can a couple opt out of a community property state?
Yes! Couples can opt out of a community property by signing a prenuptial agreement. The agreement outlines details of community property and covers elements that individuals can buy property in their names during marriage, which remains theirs, should they divorce. It is better to engage an attorney for a better understanding of a prenuptial agreement.
Can married couples own separate properties?
Married couples can own separate properties that do not become part of the community states. However, these properties should come to them through a gift, or they have bought it prior to their marriage. Likewise, the couple can designate a prenuptial agreement to own separate properties while remaining legally in a union.
What is a community property state?
The division of assets in a 50/50 proportion, if a couple goes for a divorce is the community property law. Although, the court has the right to change this percentage.
What is not community property?
Several assets remain separate property even if you live in a community property state. The following instances do not make it to a community property.
- Property bought before a marriage
- Property received as a gift or through inheritance
- Property bought after divorce
- Debts accumulated before marriage
Parting Thoughts
Separation is an arduous and emotionally draining process; on top of assets, division is a hectic task. Therefore, nine states developed and adopted the community property states to lower the trauma of asset and liability division.
The law states that all properties will go in a ratio of 50/50 between divorcing partners. However, there are certain exceptions, as assets purchased before marriage do not fall under community property. Likewise, gifts and inherited assets also are exempted from community property.
Since it is a time-consuming effort, we recommend having an attorney to guide you through the process. Since laws have their hidden details, professional advice is always better.
We hope we can explain community property states and that you are better placed to make your marriage-related financial decisions. Please leave your views in the comments section, as we always love hearing from you.
