One of the most important concepts for married couples who live in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) is the distinction between community property and separate property. Below is a general overview of these concepts.
Key Terms
- Community Property: Community property is owned equally (50/50) by both spouses in a marriage. By default, community property includes all property acquired by either spouse during the marriage unless the property can be traced back to separate property funds used at the time of purchase.
- Separate Property: Separate property is owned entirely by one spouse in the marriage. By default, separate property includes property that one spouse owned before the marriage or received during the marriage as a gift or inheritance.
- Quasi-Community Property: Quasi-community property is property acquired in a non–community property state (which includes most U.S. states) that would have been considered community property if it had been acquired while living in a community property state.
Differences Among the States
One major difference between community property states is how community property is treated in the event of a divorce.
While all community property states generally recognize that community property is owned equally by both spouses during the marriage, the rules for dividing that property upon divorce vary.
- In some states—such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, and Texas—community property is typically divided equally between spouses.
- In other states—such as Washington and Wisconsin—the court may consider multiple factors when determining a fair division of property. This may or may not result in an equal split.
Some community property states also allow community property with right of survivorship through agreements, account titles, or property deeds. This means that if one spouse dies, their share of community property automatically passes to the surviving spouse without going through probate. Not all community property states offer this option.
The extent to which spouses have equal management and control over community property can also differ between states. In some states, both spouses have equal authority to manage community property. In others, certain transactions may require consent from the other spouse.
The treatment of separate property can vary as well. Some states strictly maintain the distinction between separate and community property, while others apply a doctrine known as commingling, where separate property can become partially or fully community property if it is mixed with community assets.
Why Is This Important?
Whether property is classified as community property or separate property affects how that property can be sold, managed, taxed, or transferred during life or at death.
If the character of property is unclear, disputes may arise between spouses, beneficiaries after death, or even taxing authorities.
If you and your spouse are unsure whether your assets are owned jointly or as a mix of community and separate property, your attorney may ask you to clarify how you want your property categorized before creating your estate plan.
Identifying Community and Separate Property
Community property is typically created when property is purchased using income earned by either spouse during the marriage or through credit based on either spouse’s earnings. This includes most property acquired during the marriage unless it can be traced back to separate property funds used for the purchase.
Proceeds from the sale of community property generally remain community property.
Separate property belongs entirely to one spouse and typically includes property owned before the marriage or received during the marriage as a gift or inheritance.
It is also common for couples who marry later in life to enter the marriage with significant assets of their own. These assets generally remain separate property unless intentionally converted.
Like community property, proceeds from the sale of a separate property asset remain separate property.
Moving Between Community and Separate Property States
If you move from a community property state (such as Washington) to a separate property state (such as New York), your existing assets may be reclassified from community property to separate property.
In some cases, you may be able to preserve the community property character of assets even after moving. This can sometimes provide meaningful income tax planning benefits.
The rules governing this reclassification vary depending on the laws of the new state. Understanding how your assets will be treated in a new state is important for maintaining proper documentation and protecting your property rights.
Planning Considerations
In many long-term first marriages, most or all of a couple’s assets are community property. However, couples who were previously married or who marry later in life often have a mix of community property with their current spouse and separate property from before the marriage. It is also common for spouses to receive inheritances from family members that remain separate property.
Regardless of the situation, it is important for spouses to clearly identify what property is community and what property is separate and to reflect that understanding in their estate plan.
Questions to Discuss With Your Attorney
- If either of you expects to receive gifts or inheritances during the marriage, do you want to ensure those assets remain separate property?
- If you are in a second marriage or do not share children, do you anticipate that beneficiaries might disagree about whether certain assets are community or separate property?
- If you currently have a mix of community and separate property, do either of you feel strongly about maintaining that distinction? Or would you prefer to convert all property to community property?