Tying the knot isn’t just a question of love—it’s a question of money. In some states, there is an ownership distinction called “community property” whereby any real estate or property accumulated by either spouse becomes the community property of both.
In the United States, only nine states have community property laws. They are:
Community Property States
- New Mexico
It’s easy to laugh about two spouses arguing over who owns what—including the burden of certain responsibilities like washing the dishes and taking out the trash. But when it comes to dividing property after a divorce, the question of ownership is far more serious. Of course, a divorce is not the only event that could bring community property into relevance. The laws also spell out what spouses owe, not just what they own.
What is a Community Property State?
Community property states are those states that have laws where a marriage creates an equal share of assets between partners. In some states, this means an exact 50-50 split, while in others it means that a judge can allocate an asset between the two parties according to what they find equitable.
Inherited assets and gifts are usually not considered community property, and assets acquired before marriage may not be either, though in some states they are commuted to community property automatically. As mentioned above, it’s important to note that debts acquired during the partnership will most likely be subject to the community property classification as well.
If you’re wondering where community property laws come from, it may come from ancient Germanic tribes, who then carried the practice into medieval France and Spain. By contrast, in English Common Law (which forms the basis of law in many American states) wives were legally viewed as an extension of their husbands, as were their assets. The French and Spanish carried community property laws to the Americas with them, which is why many of the states on the above list are former Spanish or French colonies (though not all of them).
In addition to the states mentioned above, Alaska, Tennessee, and South Dakota give spouses the option of holding all or part of their assets as community property.
Each remaining state in the US is a non community property state. In these common law states, each spouse’s separate property is considered their own by default unless stated otherwise in marital agreements or the property rights spelled out in association with that asset (for example, the deed to a car or house).
The assumption in these non community property states is that spouses are not engaged in mutual property ownership, even if it seems like their behavior indicates equitable division of an ostensible community asset. For example, a couple may live in a home together, but the home may be owned by only one spouse.
What Happens to Community Property at Death?
Community property rights are an important consideration because they also spell out how equitable distribution of community funds or a community asset occurs in the event of one spouse’s demise, even without soliciting the services of a law office to create an estate plan.
In community property states, if one spouse dies, their half of the community property goes to the surviving spouse, unless their will directs an alternative course of action. What this means is that in the absence of a will in community property states, assets can avoid probate, a painful and lengthy process that allocates the property of the deceased to survivors.
Community property usually also applies to an asset listed in the name of one spouse that was purchased during their marriage. For example, a car or with one spouse on the title will likely still be considered community property. In most cases, real estate will be considered a community property interest as well.
Though assets separately inherited or acquired before marriage are not considered community property, they are if they become mingled with community property to a point beyond recognition. An example of this is money in a joint checking account. It would also relate to the community property asset of a jointly-owned account set up for retirement benefits, even if two separate income streams funded it.
Tangentially, since there are caps on contributions to some types of tax-deferred retirement accounts, it is beneficial for each spouse to have their own retirement account. In community property states, these accounts may fall into the category of a community property asset, unless they were established and funded before marriage. And yet, considering that ongoing contributions were made during the course of the marriage, it is worth consulting with a lawyer in your state to see if they fall into the category of quasi-community property or community property outright.
What Happens to Community Property When You Move to a Common Law State?
If a couple moves from a community property state to a common law state, the property they purchase in that common law state will see each of them retaining a 50 percent share of interest in that property. This is not the same as community property, and it can create legal issues to navigate in the event of a death, divorce, or debt.
The same might be true of a domestic partnership or common law marriage (that is, where two individuals live together for a certain period of time without legally getting married). There might be a difference between two states and how they view domestic partnership and common law marriage, so it’s important to understand the differences, if any, and what that will mean in terms of community property rule.
Of course, if a couple moves from one community property state to another community property state, nothing will change—or perhaps it will. Remember, while there are several community property states across the United States, some of them only question the issue of equitable distribution of community property as needed. At which point, the community property is parceled out by a judge according to what they find reasonable after considering the circumstances.
Incidentally, you might also be wondering what happens in the opposite case: moving from a common law state to a community property state. The answer to that depends on where you move. If you move to California, Washington, Idaho or Wisconsin, your assets will become community property (barring individual assets, such as inheritances, gifts, and those acquired before marriage that have fully retained a separate identity). If you move to Alaska, Arizona, New Mexico, Nevada, or Texas, the status of your assets won’t be commuted to community property automatically, though you can elect to have that done.
How to Protect Your Assets in Community Property States
You want love to last forever, but what if it doesn’t? Some couples like to avoid thorny legal issues that may come up in community property states should they split ways by getting a prenuptial agreement, or prenup for short. This contract is created before marriage and specifies how property will be allocated in the event of death, divorce, or bankruptcy.
Unfortunately, in community property states, specifying what you’d like to see in a will does not override community property directives. However, you are always free to specify whom you’d like to bequeath your share of ownership to, and if it’s not your spouse, you can specify as much in your will. Just be aware that this may mean your surviving spouse and the named beneficiary need to fight it out in court or share it peaceably.
Remember that in some states, community property is 50-50, while in others, it may be allocated differently. Also keep in mind that if an asset has language in the deed (such as joint tenancy or rights of survivorship), that will supersede what you specify in your will, because property with this type of specification will automatically pass to the surviving partner or spouse. This is especially important to consider if some of your assets are income generating rental properties. Consulting a lawyer skilled in real estate asset management can help you make solid legal choices in regards to long term estate planning.
What if I own property in multiple states?
In order to determine if community property laws apply to your living arrangements, you need to look at which property you consider your domicile for tax purposes. This will typically also be the state where you vote and where you consider your permanent residence to be.
Property in other states may not be subjected to community property laws, though it is possible to create a community property trust as a sort of legal vehicle that transcends state lines. Remember that the idea of community property is actually quite convenient for keeping assets within a partnership and avoiding contestation from disgruntled and/or opportunistic relatives in the event of one partner’s demise. However, barring the creation of such an entity, properties outside your domicile that are in common law states will not be brought into the 50-50 arrangement facilitated by the community property system.
It’s important to remember that if you own additional property in any of the other community property states, that real property will also be subject to community property laws. Of course, if it was purchased before your marriage or partnership, or if it was gifted or bequeathed to you individually, it is not considered community property. While this concern does mostly relate to real property or tangible assets, it might also relate to financial assets, like a retirement or bank account. For example, one spouse might have a bank account in their name only in a common law state, removing it from the rules around community property.
This particular manifestation of asset ownership across state lines can become tricky, so it’s best to consult with a competent legal counselor versed in community property laws to determine the nature of your financial assets. Remember, many people open checking accounts in one place, move to another place, and don’t even realize that their checking account is still associated with a different state.
Community Property Laws Are an Important Asset Protection Consideration
Community property laws are an important consideration for married couples who reside in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—where community property is an assumption. This is certainly true as it relates to personal assets, like a home, car, bank account, or retirement account. It’s also very applicable, perhaps even more of a consideration, for couples whose business involves tangible assets, such as real estate investing. The death of one spouse, a divorce, or individual debt can trigger the applicability of these community property laws.
At the same time, community property laws can also be a convenient, no-hassle estate planning vehicle that comes as the presumed status in certain states for keeping assets within the family, since the asset in question will automatically revert to the surviving spouse, circumnavigating the process of probate or legal battles that could ensue with disgruntled relatives. Either way, it’s important to know which states follow common law in regard to the property of married couples, and which states follow community property.