If you live in one of the community property states, community property laws kick in the minute you marry, but you may not think much about them until the moment you divorce. That's because community property laws affect which spouse owns what in a marriage, a fact that seems much more important when you are dividing up the marbles at the end of the game. But even if you aren't married yet, much less divorced, it's important to know if you live in a community property state and to understand what that may mean for your finances in the future.
What States Are Community Property States in 2018?
As of 2018, there are nine community property states. They are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. You will note that many of these are on the West Coast.
One other state, Alaska, can be considered a hybrid community property state. In Alaska, a couple can opt to treat marital assets as community property but must sign a joint agreement to do so. This is also the case in Tennessee and Oklahoma. Puerto Rico has community property laws on the books, but it is a territory, not a state.
Read More: What is Community Property?
What's a Community Property State?
There are lots of ways to divide up states, including geographically (Eastern, Northern, etc), politically (Republican states, Democratic states) and weather-related (semi-tropical states, frigid states.) So what's a community property state?
A state is called a community property state based on the laws it enacts. If it enacts community property laws, it joins the community-property-state club. The only way a state can get rid of the community property state status is to get rid of its community property laws. So, clearly, the defining question is: what are community property laws? They are laws that provide for a certain type of property ownership in a marriage.
In yesteryear, people used to say that two people become one when they marry. But they don't always stay one. Divorce happens in many cases and death happens in even more, bringing an end to the time of oneness and requiring some kind of legal division of marital property. That's where community property laws come in, providing a default method of dividing property ownership after a marriage ends.
Community property laws divide a couple's property into separate property and community property. Separate property is property that belongs solely to one spouse. Community property belongs to the two spouses equally. If a marriage ends in divorce, the court gives each spouse separate property. It divides the community property down the middle.
To understand the scope of community property laws, it's important to understand that "property" in the laws does not just mean the house and the bank account. The term includes businesses and business property, investments, bonuses from work, retirement accounts, stock dividends, IRAs and Keough funds, pensions, all real estate, boats, cars, trucks, jewelry, artwork, furniture and any other real and personal property purchased during the marriage. How about debt? All debt created during the marriage for the benefit of the couple is usually community debt, attributed equally to the spouses.
The concept of community property came from Spanish law, which itself derived from Roman civil law and the Visigothic Code. The intention of these laws is to acknowledge that both spouses (in generations past, a breadwinning spouse and a homemaker spouse) contribute to a marriage in different but equally important ways.
What's an Example of Community Property?
The basics of community property law provide that the property a person owns at the time she enters a marriage is her separate property, as are all gifts she receives during the marriage, including any inheritance. On the other hand, all money earned by either spouse during the marriage belongs equally to the two spouses, as well as any and all property purchased with that money, investments made with that money or interest earned with that money.
So, let's say Kevin marries Lee. At the time of the marriage, Kevin has $400,000 in an investment account and $400,000 in real estate. Lee has much less, a rented studio, a bank account of $200 and an old Volkswagen. During the 10-year marriage, Kevin earns $200,000 a year, Lee makes only $10,000 a year. When the marriage ends, the couple has $300,000 in the bank and $500,000 equity in real property they bought. Under community property laws, Kevin would get his separate property, i.e., the investment account plus the real estate he brought into the marriage. Lee's separate property would include the Volkswagen and the $200 bank account. But the entire $800,000 the couple amassed during the marriage would be community property and be divided right down the middle. Each spouse would be entitled to $400,000.
Don't take this "division down the middle" too literally. The court won't order a home or car sliced into two pieces. It's only the final accounting that must be even. If one person gets the house, the other must get assets equal to the value of the equity in the house. Or a spouse getting more valuable assets might also be assigned a larger share of the debt. If the property division results in one spouse getting assets that are worth more than those received by the other, the spouse who received more valuable assets may be ordered to pay the other a sum of money to make up for the difference, called an equalization payment by lawyers. If you are talking about an equalization payment for a business or for real estate, the amounts owed can be large.
Can Separate Property Become Community Property?
Many people are aware of the basics of community property law – that everything you had when you came into the marriage is separate property and everything you earn during the marriage is community property. But you may not know that sometimes people convert separate property to community property without doing it deliberately. That happens if you mix your separate property funds with community property funds so completely that it is impossible to untangle them. In that case, the court can rule that the entire account is community property. This is called co-mingling.
For example, if, upon marriage, Kevin took half of his $400,000 investment account and stuck it into the bank account the family used for regular expenses, a court might find that he intended to make a gift of it to the community. Or it might rule that since the money got mixed with community property funds and cannot be traced, it converted into community property. In either case, the character of the property has changed from separate to community.
If you want to keep your separate property separate, do not mingle accounts. Deposit paychecks you earn during the marriage into a community property account and retain any gifts or inheritance money in a separate property account. That way your separate property retains its status as separate.
Can You Opt Out of Community Property Laws?
If you live in a community property state, the court will use community property laws to divide your marital property when the marriage ends. But it will not do so if you and your spouse have entered into a valid, legally binding, pre-nuptial agreement under which you both agree to divide the property, in case of divorce, in some other way.
It might be easier to think of community property laws as creating a presumption that all property acquired during marriage is community property, belonging equally to the two spouses. You can overcome that presumption with a valid contract signed by both parties agreeing to divide up ownership in another way.
Community Property and Death
Although you hear a lot more about community property in divorce matters, the community property laws also impact property when the marriage is terminated by the death of one spouse. Each spouse is free to write a will disposing of all of his separate property as he sees fit, and, in many states, his half of the community property. But neither can give away the other spouse's community property interest.
In community property states, a married couple’s assets are divided evenly in death, as well as divorce. The estate of a deceased spouse is only 50 percent of the married couple’s community assets. Sometimes couples hold real property as community property with the right of survivorship. In that case, when one spouse dies, ownership of the half interest automatically transfers to the other spouse.
Community Property States and Student Loans
In community property states, the laws assign both marital assets and marital debts equally to the spouses. Let's say that Kevin and Lee, a married couple, bought a house in Texas for $300,000. When they divorced, the house was worth $350,000, but they still owed $200,000 on it. Regardless of who signed the loan documents, the court would assign one-half of the value of the house and one-half of the outstanding loan to each spouse. It wouldn't be fair to give each spouse half of the $350,000 value but leave one spouse carrying all the debt. This applies to credit card debt and many other types of debt.
Student loan debt is one type of debt that is treated differently in some community property states. Obviously, if the debt is incurred before the marriage, it is the separate debt of one spouse. In a divorce, that spouse will be assigned all of the student loan debt. If it is incurred during marriage, the issue is more difficult. The details and language of community property state laws vary, so no uniform answer is possible. How that debt is handled depends on the law, how it's been interpreted in state courts and a number of factors about the debt.
In several community property states, the question the court asks in the case of student loans is who benefited from the debt. If both spouses benefited, the student loan debt may be considered a community debt and each spouse assigned to pay half in a divorce. If only one spouse benefited, the debt may be assigned to the spouse incurring it.
For example, imagine a spouse who went back to school at the beginning of a marriage and got a law degree, then earned an excellent salary for the next 15 years as an attorney before the marriage ended. A good argument could be made that both spouses benefited from the student loans since both had better standards of living because of the educational advancement of one of them. If any student loan debt remains when they divorce, it may seem fair to categorize it as a community debt.
On the other hand, imagine a spouse who goes back to law school after a few years of marriage. Supported by a working spouse, the spouse incurs tuition debt of $250,000, gets the degree, then promptly gets a divorce. It seems less fair to saddle the other spouse with half of those debts when she got no benefit from the funds. This is the weighing process a Texas court will do in determining whether a student loan debt is the separate debt of the spouse who obtained it or a community debt.
- Barrons: How Community Property States Are Different
- Find Law: Marital Property
- Find Law: Community Property Overview
- Cornelle Law: Community Property
- Investopedia: Which States Are Community Property States?
- The Balance: Community Property States
- Investopedia: Community Property
- Santa Barbara County Bar Association: Community Property
- Jaburg/Wilk: What is Community Property Law in Arizona and Why Does it Matter?
- My Alamo Attorney: How are Student Loans Divided During the Texas Divorce Process?