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Understanding The Basics of Community Property For Divorce and Estate Planning Purposes

COMMUNITY PROPERTY STATES

UNDERSTANDING THE BASICS OF COMMUNITY PROPERTY

 

If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, when you begin divorce proceedings or estate planning, you will confront property ownership that is known as "community property." "Community property" form of ownership is originated in Spain. The other states – called "common law" jurisdictions – base their property ownership system on that of England.

In community property states, no matter how the property is titled, all property – including income from all sources – acquired during marriage by either spouse is automatically divided into two separate, undivided one-half interests. "Undivided" interest means each spouse owns half of the whole "pie," not a specific one-half. Excluded from "community property" is (1) property that was acquired by a spouse separately and brought into the marriage and (2) property acquired by gift or inheritance, or in exchange for separate property or money. This property remains separate, but sometimes, because of commingling, it is difficult to prove.

 

Some community property states treat income produced by separate property differently than others. For example, California, treats separate property income as separate property, while Texas treats income produced by the separate property of one spouse as community property. Because each community property state has different nuances in its laws, it is essential that you contact qualified professionals in your state to find out the rules there.

 

Practically speaking, commingling of assets can make separate property ownership unclear, until it finally becomes community property. This often happens when checking accounts and other financial transactions are combined or used for community purposes. But since the two equal, undivided interests of the spouses in community property are separate, each spouse can dispose of his/her half of community property by will. This means that community property does not automatically pass to the survivor, as it would if owned jointly, with right of survivorship. And the deceased spouse's federal taxable estate contains his/her half of the couple's community property.

 

On the other hand, generally speaking, in common law states, property ownership is determined by title; however, when a divorce action begins, the inchoate (or sleeping) right to equitable division becomes an active issue.

 

Understanding community property deserves the attention of (1) Those who now live in a community property jurisdiction, and (2) those who acquired money or property while living in one of these states previously. You should know about the law in your state so that you can begin to understand the extent of your rights in community property before getting divorced or attempting to give your property away by gift, by will, or in a trust.

 

Remember: If the will of a deceased spouse tries to dispose of both halves of a piece of community property, the surviving spouse can go to court to prevent the transfer of the half interest the deceased person had no right to give away. In some community property states, it is possible for spouses to change their ownership rights in an asset from community property to separate property – or vice versa -- by entering into a written agreement.

In common law states, longer marriages may tend to result in a "50-50" division of property at divorce; however, an equal division is not automatic. In these states, the courts are supposed to be "equitable and fair" in dividing assets based on contributions of the spouses. The tremendous economic value of the wife’s historical homemaker role is being recognized by divorce courts. That’s why, oftentimes, being "fair" means a "50-50" division of assets.

 

But common law states do not require that marital property be divided equally. For example, if a wife has a thriving business during marriage and her husband does little to contribute to the success of the family, it is inconceivable that he would receive half the money and property acquired during marriage; however, in a community property state, the husband's actual contribution to the marriage and assets is irrelevant – and he is entitled to half.

 

But if either or both spouses ever was a legal resident of a community property state, it is important for each to keep records of their estates prior to marriage, inheritance received during the marriage, the value and source of funds used to buy property during marriage, and the legal residence at the time of acquisition. These are all important factors needed to identify the property rights of the spouses. This can become quite complicated: If one spouse acquires an asset separately in a common law state, depending on the facts, the property may be converted to community property if the couple moves to a community property state -- even if only one spouse's funds paid for the asset.

 

© 1997, Flying Solo. This information is general in nature and is not intended to be construed as legal advice. Because all situations are different, do not make any decisions until you have consulted with the legal professional of your choice.

 



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