Community Property Meaning, and When and Where It Applies

What Is Community Property?

Community property refers to a U.S. state-level legal distinction that designates a married individual's assets. Any income and any real or personal property acquired by either spouse during a marriage are considered community property and thus belong to both partners of the marriage.

Understanding Community Property

Under community property, spouses own (and owe) everything equally, regardless of who earns or spends the income. Community property is also known as marital property.

In community property jurisdictions, each spouse in a marriage is considered to own a share of the marital assets, including any financial or real assets acquired during the marriage. In some jurisdictions, such as California, community property is divided strictly in half, with each spouse getting 50% of any assets found to be marital property. In other jurisdictions, such as Texas, a judge may choose to divide assets in any denomination that they consider equitable to both spouses.

Usually, gifts to and inherited assets of one spouse are not considered community property. Assets acquired before the marriage are not considered community property (although in some jurisdictions, these assets can be commuted to community property). Debts acquired during the marriage can be considered community property.

For example, an IRA in the name of an individual with a spouse, accumulated during a marriage, would be considered community property. Generally, the spouse of the retirement account owner who resides in a community or marital property state must be the sole primary beneficiary of an investment account designated as marital property, unless the spouse provides written consent to have someone else designated as the primary beneficiary of the retirement account.

Origins of Community Property

The concept of community property exists to protect spousal rights. Some consider the law to have originated in Spanish law, a system of civil law derived from Roman civil law and the Visigoth Code. However, certain forms of marital community have also been traced back to ancient Egypt and Greece with text from the Code of Hammurabi containing some legal features of community property (as well as other ancient accounting systems) still used today.

The idea behind community property ties to ancient Roman society where a family was a basic, single social unit. Although early Roman marriage laws disallowed a wife from possessing anything of her own, later Roman law allowed the wife to own in her own name. This shift in Roman law gave rise of the dowry system or other.

After the fall of the Roman empire, the Goths in Spain concerned themselves with legal unification. The Code of Euric as well of the Fuerzo Juzgo both outlined legal precidence for the property a husband and wife share, with the latter containing the custom of the community of property. Community property was subsequently brought to the United States; for example, insured by Spanish rules, California formally recognized community property in 1849.

States With Community Property Laws

In the United States, nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. However, each state will have its own state laws that defined how community property is defined or what constitutes a legal arrangement. For example, four of the nine states recognize some form of domestic partnership as an acceptable alternative to marriage.

Alaska has an optional community property system, in which spouses may agree to hold some or all marital property in common by creating a community property trust or community property agreement. Tennessee and South Dakota have similar systems.

Kentucky and Florida have also adopted similar community property systems laws. Both states adopted policies that allow residents and non-residents to establish community property trusts. Puerto Rico also allows the property to be held as community property as do several Native American jurisdictions.

Community Property and Estate Planning

Property is often an essential process of estate planning and financial management. Several major life changes may have a direct impact on the community property laws a household is under.

Change of Domicile

The most straight-forward change occurs when the individuals that formed the community property estate move to a common law state. As the household is no longer covered by community property law, the community property estate is terminated when relocating to a state not listed above.

Death

In community property states, when one member of the estate passes away, the community property estate is terminated on the date of death. Most often, the spouse is entitled to that spouses residual assets. However, each community property state has specific rules that differentiate the handling of assets at death. For example, a surviving spouse in the state of Washington will receive:

• All of the deceased's share of net community estate
• Half of net separate assets if the deceased had children or surviving heirs
• Three-fourths of net separate assets if there are no surviving heirs but the deceased is survived by one or more of their parents
• All of net separate assets if no surviving heirs or parents exist

Divorce

Most states hold that community property estate is terminated upon final decree of divorce or legal separation. Even if the individuals live separately from another (within a community property state) or have filed a petition for divorce, the individuals have not yet formally dissolved the marriage. Different rules exist for common property estates in California and Washington based on physical separation.

Physical Separation

Both Washington and California hold that a community property estate is terminated when spouses physically separate with the intention of ending a marriage. This mutual intent is evaluated based on the actions of each individual, and relevant issues with the dissolution of a community property estate are analyzed individually. Often, when contention, the burden of proof resides with the party believing the community property estate was terminated.

What Is and Isn't Included in Community Property?

As noted throughout this article, each state will have specific definitions of what is or is not included in community property. For example, in California, all property, real or personal, acquired by a married person during the marriage while the individual is domiciled in California is to be treated as community property.

For some, it may be easier to identify property that is excluded from community property. For instance, Idaho identifies the following items as separate property (not subject to community property laws) for its jurisdiction:

• Property that either spouse owned before the marriage.
• Property that either spouse received as a gift or inheritance, even if the item was received during marriage.
• Property that either spouse acquired using separate-property funds.
• Property or money acquired while domiciled in a separate property jurisdiction.
• Property listed in a valid, executed prenuptial or postnuptial agreement.

Variations to Community Property

There are several similar yet different variations to community property. Different governing bodies, including different countries, may choose to enact some of the following types of community property legislation:

• Community of Acquests and Gains: Each spouse owns half interest in all property acquired during the marriage. Excludes from community property include gifts, inheritances, property acquired prior to marriage, or property acquired when the parties were permanently living apart. This often resembles most community property laws in the U.S. today.
• Community of Profit and Loss: Each spouse is entitled to the same treatment as the community of acquests and gains. However, debts and liabilities are maintained separately.
• Limited Community Property: Each spouse is entitled to the same treatment as the community of acquests and gains. However, a broader set of properties received during the marriage are maintained as separate property.
• Absolute Community Property: All pre-marital marital property is community property. Property acquired as part of a previous marriage may be excluded for the protection of heirs (children) from a former spouse.

Drawbacks of Community Property

There's a few things to keep in mind about community property states. First, the concept of community property extends to liability for debts in most cases. In community property states, both spouses are typically held equally responsible for all debts acquired by either spouse, regardless of individual contributions or direct benefit. This can be problematic if one spouse accumulates substantial debt without the other's knowledge or consent.

Another downside to living in a community property state is the potential for unequal treatment of financial contributions within the marriage. This can lead to feelings of unfairness or resentment, particularly if one spouse feels burdened by debts incurred primarily by the other spouse. In the eyes of the state, most assets will be equally shared.

There is a little bit of risk worth mentioning regarding community property states. In the event of default on joint debts, creditors may have the legal right to pursue jointly owned assets or make lien claims as compensation. This means that jointly owned property could be seized. As mentioned above, since everything is co-owned in community property states, specific assets or debts may not able to be sheltered between spouses as they are collectively shared.

The Bottom Line

Community property law sets the standard that the income and assets of a married couple are jointly owned. Even if one party earns more or contributes more net income to the household, assets are often owned equally. Nine states have adopted community property laws, and the community property estate is often dissolved only in the course of death, divorce, departure from a community property state, or physical separation.