Community property and separate property states differ relative to divorce or death. The property two people secure while married is called marital property. This includes several things: real property (like homes and rental properties), stock options, investment accounts, heirlooms, and employment income.
People assume that every spouse wants to share their property with their partner. However, this is not always the case. In fact, one member of a couple may or may not decide to share or transfer ownership. Legally speaking that is not always the case. The blog addresses the differences between community property and separate property.
Community Property or Separate Property
Attorneys classify money and property acquired during a marriage as either community property or separate property. This classification assumes two factors: where the person lives and where they keep their money and property.
Marital Property Rights
In this case, legal professionals decree that the property someone obtains during their marriage belongs equally to both spouses. This applies regardless of the property’s title or deed. Some cases exist, however, in which legal pros do not deem property as community property. For example, consider community property states when one partner:
- Secures property prior to the marriage.
- Obtains inheritance or gifted property during the marriage.
- Buys property during the marriage.
- Faces a pre- or post-marital agreement.
Nine states operate as community property states: Texas, Arizona, Washington, New Mexico, California, Nevada, Idaho, Wisconsin, and Louisiana.
Co-mingling Property
Money and property deemed separate before marriage retain that characterization. However, the spouse could commingle the separate property. They may do so using funds or property acquired through community property. Commingling happens when money and property from one source combines with money and property from another source. Co-mingling essentially mixes the money together.
Separate Property States
Mosts states remain separate property states. Some are called common law states. The default characterization in separate property states is that property obtained during the marriage is not automatically deemed community property. Classifying money or property relies on the title or deed. The property belongs to whoever purchases it, with some exceptions.
Community Property Trusts
A few states (Alaska, South Dakota, and Tennessee) offer elective options. These allow residents (and sometimes, even nonresidents) to opt into a community property system. Or they may transfer property into a trust for community property. In addition, some separate property states (such as Florida) have recently enacted community property trust acts. These enable residents to benefit from certain tax attributes of community property.
Potential Problems
The implications of separate and community property manifest after a death or divorce. These life events require property identification and segmentation. When a couple divorces in most states, legal professionals determine the equitable distribution of property and money. At the time of a death, the legal determinations ensure that the court distributes inheritances in an orderly fashion. Issues may arise during death or divorce depending on whether you live in a community property or separate property state. Based on differing expectations of all parties involved, disagreements may arise.
Potential Problems in Divorce
When spouses divorce, one party may believe they maintain an ownership interest in property. Unfortunately, however, their soon-to-be ex-spouse mays not agree. The court resolves these disputes based on the location where the couple resides.
For example, a couple may have acquired a home, two cars, and cash that they kept in three accounts. Imagine that the wife opened another account on the sly, using money she earned from her employment during the marriage. If the couple separates, the husband might believe he is entitled to half of the account balance. But the wife may disagree. The court determines who is right.
Divorce Case Study
- The outcome may depend on where the couple lives.
- If they live in a community property state (California), the default rule maintains that all money and property acquired during the course of the marriage (including the wife’s secret account) belongs to each spouse equally.
- In that case, the husband would be correct.
- However, in a separate property state (Georgia), the judge rule that the money in the wife’s secret account is separate property.
- However, the divorcing couple may still choose to divide the account if they are equitably distributing money and property during the settlement.
Potential Problems in Death
Community Property At Death
In addition to divorce-related issues, property classification comes into play when a spouse dies. These issues impact how the courts transfer money and property. In community property states, money and property acquired during marriage are classified as jointly owned. As such, they pass to the deceased’s spouse.
Separate Property At Death
In separate property states, such a transfer is not automatic. For example, no one guarantees that the surviving spouse inherits the property of their deceased spouse. However, many states, regardless of how they classify property, offer spouses a homestead exemption. This protects their rights as long as they live in the home. Homestead exemptions differ from state to state, with varying outcomes. In addition, most states do not allow one spouse to completely disinherit the other.
Proactive Planning
The most important thing any couple can do to avoid these complexities is to communicate. Also, hire an experienced estate planning attorney. We will help plan for the unexpected with a comprehensive estate plan.
