Community property states consider spouses to be joint owners of almost all debts and assets that are acquired in a marriage. There are 9 states that require spouses to legally share income, assets and debts. Additionally, there are 5 states that allow for you to opt-in to these laws and 3 that extend them to domestic partnerships.
The property law of your state of domicile becomes important in case of divorce and death.
What are the rules around community property law states and how does it impact you?
Key Takeaways:
- Community property laws say any asset or debt acquired during a marriage are equally shared by both partners
- Common law property say that the spouse who is named on legal documents retains sole ownership
- There are 9 states with community property laws, 5 states that allow for opting in to the rules, and 3 states that extend the rules to domestic partners
- The laws vary state to state
- There are some property that is exempt from the community property rules even in those states
What are Community Property States
Most states follow common law, however there are 9 states that are community property states. This means that all the income, assets, and debts acquired during a marriage are owned equally between spouses.
This becomes increasingly important in case of a divorce as the couple is required to equally split all finances acquired in a marriage.
There are currently 9 community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.
How do Community Property Laws Impact You?
Community property laws may impact you in case of a divorce or death.
If you divorce in a community property state, you need to split all assets acquired during the marriage equally. The word “property” in community property doesn’t refer only to physical property, but all financial assets and debts.
If your spouse dies with debt, it would legally become yours. If you are concerned of creditors, there are ways to avoid them getting access to your assets. Life insurance policies avoid creditors, and you can assign the benefit to your children or a trust.
The laws were established to ease the trauma of divorce by applying equal ownership of the property. The goal is to ease the fighting over assets and debts by having a clear law dictating how to divide the property.
How Community Property Laws Work
The debt and assets you acquire while married is considered community property in a community property state. Therefore, even if you spouse did something irresponsible or if they came into a windfall, you are both have an equal share in the finances.
If you divorce, assets must be split equally. This includes:
- Income earned while married
- Real estate
- Savings, investing, and retirement accounts
- Any personal property like automobiles or funiture
Additionally any debt that was acquired while married is split evenly.
However, assets that were acquired before the marriage are not considered community property. As long as the assets aren’t moved into a joint account or used for joint purchases, they are still considered yours.
In a divorce, community property must be sold or split. Although, if the divorce is amicable, you can agree on a way to distribute your property that leaves both parties happy.
The debt accrued during a marriage is also evenly split, even if it is in one spouses name.
What are the 9 Community Property States?
The 9 states with community property laws are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Additionally, in the 3 states of California, Nevada, and Washington, community property laws extend to domestic partnerships. And in 5 states you can opt into a designation on certain assets – Alaska, Florida, Kentucky, Tennessee, and South Dakota.
When do community property laws not apply?
Even in a community property state, there are certain assets that may be exempted from the laws. These assets include:
- Property acquired before the marriage
- Property gifted or inherited through a will or trust to one spouse
- Property specified in a prenuptial agreement that was created before the marriage and agreed upon handling in a divorce
- Any property acquired when the spouses are legally separated and living separate
- Debts that are acquired before marriage
However, all the above exemptions are voided if the property becomes commingled through joint accounts.
What if there is a prenup?
Prenuptial agreements signed before marriage can state how any property acquired during the marriage is split in case of a divorce. Prenups are typically honored and will guide the outcome of a divorce in all states.
However, anything can happen in a divorce court.
A valid prenuptial agreements that doesn’t violate any state or federal law will likely be accepted. If the judge agrees that the couple came to an agreement in a valid way without coercion, the assets will be split based on the agreement.
Your primary legal residence determines which law to follow
If you have multiple homes, the state that is listed as your primary legal residence is the one that dictates how assets are handled in a divorce. This is per the Internal Revenue Service (IRS) and is called your domicile state.
There are many factors that go into determining your domicile, including but not limited to:
- Your citizenship status
- Where you pay state income tax
- Where you are registered to vote
- The state you live in most often
- Any business and social ties
What is Common Property Law?
The other system for property is common property law. The 41 states not listed above all follow this system. Under common law, if a person is the sole person listed on legal documents, it is considered their property alone.
Legal documents can include titles, registrations, and deeds.
The unnamed spouse is not jointly responsible for any property under common law. This allows for partners to keep assets and debts separated and makes for a cleaner divorce and more choices upon death. However, a divorce judge can still make rulings to assign property to another party.
What if you are married filling separately?
If you are married and file taxes separately, if can complicate the story in a divorce. Additionally, social security benefits, investment income, and mortgage interest can become difficult to split based on state law.
Most tax professionals will advise you calculate your taxes on both a joint and separate basis and compare. The difference is typically small enough to make it not worth the effort to file separate, outside of very specific situations.
The Final Word
Marriage is a major commitment both personally and financially. It is important to know the laws of your state and how it may impact you in the unfortunate situation of death or divorce.
If you are concerned about your future financials, a prenuptial agreement can help clarify how assets are split.
As always, talk to a professional to ensure you understand how certain decisions may impact you.
Frequently Asked Questions (FAQs):
Community property laws state that any asset, debt, or income acquired during a marriage is equally split between spouses. The goal of the law is to have a clear and fair way to disburse assets to avoid fighting during a divorce.
There are 9 states with community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. There are 5 states you can opt for the designation: Alaska, Florida, Kentucky, Tennessee, and South Dakota.
Generally yes. If a prenup was legally signed and doesn’t violate any state or federal laws, it will be honored in case of a divorce. However, divorce court can be messy and a judge can rule in unexpected ways.