The Ins and Outs of Community Property Law

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While only eight states observe community property laws, there's still a good chance this affects you. That's because 25% of the American population lives in one of these community property states. So perk up your ears if you're a resident of Arizona, California, Idaho, Nevada, New Mexico, Texas, Louisiana, Wisconsin or Washington.

Community property touches everything from personal property ownership to debt to divorce and inheritance. That's why understanding the ins and outs of community property law is essential. You can arm yourself with the information that will help you understand property distribution in your state.

Defining Community Property

Community property is everything a husband and wife own together. This typically includes all money earned, debts incurred and property acquired during the marriage.

Community property states classify the following as a married couple's joint property:

1. Any income received by either spouse during the marriage.

2. Any real or personal property acquired with income earned during the marriage. This includes vehicles, homes, furniture, appliances and luxury items.

3. Any debts acquired during the marriage.

Under community property, spouses own - and owe - everything equally, regardless of who earns or spends the income.

What Stays Separate in a Community Property State

Broadly, separate property in a community property state includes:

1. All property owned by a spouse prior to marriage.

2. Property obtained by a spouse after a legal separation.

3. Any property received as a gift or inheritance during the marriage from a third party (as long as this property remains separate from community property, such as joint banking accounts).

Also, pre-marriage debts remain separate property. For example, educational loans acquired before a marriage wouldn't become community property.

But separate property can transform into community property. For example, if a spouse who owns property before the marriage adds the new spouse's name to the deed, that home becomes community property.

Divorce: When Unity Leaves Community

Rising divorce rates make community property division a reality as joint property becomes separate again. Community property laws rule in divorce court, splitting assets 50/50.

Aside from assets and debts, business interests and pensions, like 401k plans, also fall under community property. That means a soon-to-be former spouse is probably entitled to a share of your retirement.

In most divorces, community property is sold unless both parties can agree on property distribution. Such agreements typically only occur in uncontested divorces where couples decide on the divorce terms. These include everything from debt and asset division to child and spousal support. Uncontested divorces require a level of communication many divorcing couples can't achieve. However, they do allow for a level of customization not recognized by community property laws.

Death and Community Property

In non-community property states, laws prevent spouses from disinheriting their other halves. Most states allow a surviving spouse to receive a minimum of one half or one third of any property.

In the event of death, community property laws can be vital in determining who receives property. In any community property state, a surviving spouse is considered to own any property owned jointly or by the deceased spouse.

The Spread of Community Property

Community property laws don't just apply to couples living in one of the eight designated community property states. If one spouse lives or owns property in a community property state, those rules could determine your future. And Wisconsin, while not officially a community property state, has laws so favorable to married couples that it verges on community property status.

Like most laws, community property has its critics and defenders. How people perceive it often hinges on where they're standing. But whether you see community property as a savior or a hindrance, being informed is the best defense.