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If you live in a community property state, assets acquired during your marriage are shared between you and your spouse.
In a community property state, each spouse has an equal share of property acquired during the marriage
Property acquired before the marriage is considered separate property
State law determines how community property is distributed after divorce or death
Marital property laws determine which spouse owns which property in a marriage. The majority of states are common law states, which means that marital assets belong entirely to the spouse who owns them. But several states and U.S. territories use community property systems, in which both spouses own an equal share of all property acquired during the marriage.
There are currently nine states that have community property laws:
Three more states allow spouses to opt in to community property:
Puerto Rico and Guam also have community property laws.
Community property laws have important implications for estate planning and divorce. Because your spouse is entitled to a one-half share of community property, when the marriage ends, he or she has a claim to the asset even if you wish to give it to someone else. However, you may legally designate assets as separate property that would otherwise be community property if you and your spouse sign a marital contract, such as a prenuptial agreement.
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In community property states, assets acquired before marriage are considered separate property in most cases. Assets acquired after marriage are considered community property. Each spouse has an equal one-half interest in their community property.
Community property generally isn’t determined by property titling. If you buy a house during your marriage and only your name is on the title, your spouse still owns 50% of the house. According to community property law, community ownership determined by the time the asset was received.
In addition, a spouse’s 50% share typically isn’t affected by how much he or she earns. A wife who earns $100,000 per year doesn’t have a better claim to an asset just because her husband earns $50,000 per year. How much each spouse paid for the asset also doesn’t make a difference.
However, depending on your state, income earned from property acquired before the marriage, such as interest payments or rent, may be considered community property. The married couple may have to agree on whether such passive income belongs to them both.
There are nine states that have absolute community property laws. However, in Alaska, you can choose between whether marital assets are community property or separate property.
Tennessee and South Dakota also allow you to designate some assets as community property, but those assets will be held in a trust. Both you and your spouse must agree to put this property in a trust; in Tennessee, it’s called a community property trust, and in South Dakota it’s called a special spousal trust.
When paying taxes on community property, a married couple can choose to file a joint tax return or separate tax returns. A joint tax return may be easier, especially when paying income tax, because the income is considered community property — you won’t have to make two different tax calculations.
If your filing status is married filing separately, you and your spouse are each required to report half of your combined income on your income tax return. Each spouse will also have to report all of their separate income, if they have any.
Whether you’re subject to community property laws generally depends on where you’re domiciled. (Your domicile is where your permanent residence is.) If you own property in another state, it may be considered community property if you bought it during your marriage, even if that state is a common law state.
Community property acquired during your marriage may remain community property even if you move to a separate property state.
However, because of the differences in state law among both community property states and separate property states, it’s best to consult with an estate-planning attorney (or a family law attorney) if you’re planning to move. If your spouse dies, you don’t want to belatedly learn that your new state’s law invalidates your old state’s law.
To get around that, you may be able to create a revocable trust in the community property state that will own the assets. You can set up the trust so that, upon your death, the trust assets are distributed according to the community property laws of the state.
If you’re currently domiciled in a common law state, and you and your spouse move to a community property state, you may wish to keep your assets as separate property. You’ll need to draw up a marriage contract — sometimes called a post-nuptial agreement — with your husband or wife that explicitly states that some or all the property will remain separate.
Depending on your state, you may have a period of time to do this, often one year from the date you move, without getting the courts involved. After that time has passed, a married couple can still create such an agreement, but it may require approval from a court.
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During a divorce, your state’s marital laws determine who gets what property. In a common law state, the assets will be split according to the terms of the divorce. In a community property state, because each spouse owns an equal share, the assets will be split in one of two ways: equitable or equal distribution.
The states that use equitable distribution of community property are Arizona, Idaho, Nevada, Texas, Washington, and Wisconsin. Marital property in these states will be divided up equitably, or as close to equal as possible, depending on the judgment of the divorce court.
In California, Louisiana, and New Mexico, property is divided up equally. When getting a divorce, each spouse is entitled to an exact 50% share in the community property, barring any legal agreements between the ex-spouses.
When you die, your assets go to your heirs. You can either choose beneficiaries through your will or let a probate court divide up your estate per your state’s intestacy laws. In a community property state, your spouse is usually entitled to your share of the community property in your estate.
However, in some cases, a spouse may be able to pass his share of community property to his or her heirs in a will. That’s because there are two main types of property ownership under a community property regime: joint tenancy and tenancy in common.
Sometimes called “joint tenants with rights of survivorship,” under this ownership type neither spouse is allowed to will away his or her share of the property. Because the surviving joint tenant has rights of survivorship, the property automatically transfers to him or her.
A joint tenancy can be created when both joint tenants — you and your spouse — purchase the property and receive the title together. Some community property states, like Louisiana, do not allow joint tenancy.
When two spouses own property as tenants in common, the deceased spouse’s share can be given away in his or her will. (There is no right to survivorship.) In a community property state, the surviving spouse still has a one-half share in property owned with tenancy in common, which means that the other half can be willed away. This is unlikely — most people name their spouse as the beneficiary of their estate — but not impossible.
Some states, like California, presume tenancy in common ownership when the property’s title doesn’t say otherwise.
Before making a purchase, talk to a lawyer about whether joint tenancy or tenancy in common is right for you and your financial situation. There may be benefits and downsides to each type.
How community property states handle life insurance policies depends on the type of policy.
With term life insurance, you pay premiums during the policy’s term, then it expires without paying out anything if you live the term.
Most people choose their spouse as the beneficiary of their life insurance policy. When that’s the case, it likely won’t matter whether you’re in a community property or common law state. When the insured dies, his or her beneficiary — the spouse — gets the death benefit.
In a community property state, each spouse should have a one-half interest in the policy, but if the beneficiary is not the spouse, the policy may pay out to the beneficiary regardless. That could be the case even if premiums were paid with income earned during the marriage; such income would be itself considered community property.
Need to get covered? Let an expert at Policygenius help you choose a term life insurance policy that works for you.
Whole life insurance is a type of permanent life insurance. It has a cash-value component that could grow. It also lasts your whole life, so it will always pay out a death benefit as long as you’re paid up in premiums.
When premiums are paid for with community property, the death benefit may become community property as well. In some community property states, when you have a whole life insurance policy and the spouse is not the beneficiary, the surviving spouse may still be entitled to reimbursement of the premiums paid out of community property assets.
Learn more about how life insurance works during probate.
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Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.
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