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E. Community Property

E. Community Property.

The term “community property” often comes up in discussions about estate planning (and divorce). It is a form of property ownership derived from Spanish law -solely between husband and wife – recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (The other states are “common law” states, regarding their marital property ownership system. American common law originated in England.)

Specifics in law differ in significant details from state to state, but the defining feature of community property is this: Irrespective of the name(s) on title documents, ownership of (almost) ALL property – including income from wages and self-employment – acquired during marriage by either spouse is automatically split, so that each spouse owns a separate, undivided one-half interest. (An “undivided” interest is one in which each spouse has half ownership of the whole “pie,” rather than full ownership of only the “left half” or the “right half.”)

In community property states, property acquired by a spouse separately and brought into the marriage remains separate. In these states, too, property acquired by gift or inheritance, or in exchange for separate property or money, also remains separate. The income, if any, the separate property produces is treated differently among the community property states. In California, for example, separate property income remains separate property. In Texas, however, income produced by the separate property of one spouse becomes community property. As a practical matter, commingling of assets can obscure separate property ownership, until it finally becomes community property. This often happens with checking and other financial accounts.

Since the two equal interests of the spouses in community property are separate, each spouse is free to dispose of his/her half of community property in a Will. It does not automatically pass to the survivor, as it would if owned jointly, with right of survivorship. Of course, the deceased spouse’s federal taxable estate contains his/her half of the couple’s community property.

The subject of community property deserves the attention of three groups of readers: Spouses who now live in a community property jurisdiction, those who now live in a common law state, but who acquired money or property while living in a community property state previously, and those who now live in a community property state, but who acquired money or property while living in a common law state previously. State laws vary, and these issues can be complex, so be aware that special attention needs to be given to the issue of community property, if you are affected by it. If so, it is important to see a lawyer for guidance in understanding the extent of each spouse’s property rights – before attempting to give it away by gift, in a Will or in Trust.

BEWARE ! If the Will of a deceased spouse attempts to dispose of both halves of an item of community property, the survivor might have to go to court to prevent the transfer of the half interest the decedent had no right to give away.

F.Y.I. It is possible in some community property states for the spouses to change their respective ownership rights in an asset, from community property to separate property and vice-versa, simply by written agreement between them.

People who do not live in community property states are sometimes puzzled to learn the definition. It sounds just like the law of property, as they understand it, in their own (common-law) states. After all, most of us know couples in divorce proceedings, in which the court split everything right down the middle. Today, the law everywhere regards marriage as a “50-50″ proposition, right? Well, sort of. Divorce law is probably a good way to study the question.

In common law states, the “50-50″ outcome that frequently occurs in divorce settlements is not automatic. The goal of the court in these states is simply to be fair. Today, the enormous economic value of the wife’s historical role as homemaker is finally recognized by divorce courts, at least in theory. Very often, therefore, being “fair” does, indeed, boil down to making a “50-50″ property split. But there is no requirement that marital property be equally divided in common law states. If, for example, a wife has a thriving medical practice during marriage, while her husband is a lazy bum, he would probably not be deemed entitled to half the money and property acquired during marriage – in a common law state. In a community property state, however, the husband’s actual contribution to the marriage, and to the couple’s marital property is largely irrelevant. He is, by law, entitled to half.

BEWARE ! If either or both spouses is, or ever was a legal resident of a community property state, records should be maintained pertaining to the estate of each spouse prior to marriage, the state of the current marriage, the identity, value and source of funds used to buy property during marriage, as well as the legal residence at the time of acquisition. These are all significant factors in identifying the respective property rights of the spouses, and the situation can get complicated. For example, property acquired separately by a spouse in a common law state is treated like community property (i.e., “quasi-community property”) if the couple moves to some of the community property states (e.g., California), even though only one spouse’s funds paid for the asset.

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