In the U.S., there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
But what does living in a community property state mean, and how does it impact the division of property during a divorce?
What’s a Community Property State?
It’s no mystery that divorce proceedings can seriously drain time, money, and well-being. That’s why several U.S. states enacted community property laws to counter some of the drama associated with divorce.
Community property law provides that any assets acquired during marriage are presumptively equally owned. Instead of each spouse being an individual owner, property and debts acquired after tying the knot belong to the “community,” meaning they belong to both of you.
The law is supposed to clarify “who gets what” and simplify splitting up property during divorce.
The flip side? You can also lose out on property that was paid for and used only by you or your partner (more on that later).
Plus, many couples may not even know about the state’s default 50/50 rule as they enter marriage.
Community Property State List
There are nine true community property states, meaning the 50/50 property division is a hard and fast rule. These states include:
- New Mexico
Couples in domestic partnerships living in California, Nevada, and Washington are also subject to community property rules.
“Opt-in” Community Property State List
Additionally, there are three states where a couple can “opt-in” to community property laws by signing an agreement. “Opt-in” community property states include:
- South Dakota
Community Property vs. Equitable Distribution
The major difference between community property and equitable distribution states is how they define property during marriage.
Community property law states consider any income, debt, or property purchased after marriage jointly owned by each spouse.
Conversely, equitable distribution states recognize individual property ownership after marriage.
For example, in a community property state, a motorcycle purchased by either spouse is considered community property.
In an equitable distribution state, the motorcycle belongs only to the spouse who bought it unless they explicitly put the other person’s name on it.
41 states recognize equitable distribution standards. In these states, a judge uses the concept of equitable distribution to determine property division during a divorce.
Equitable distribution is a legal rule that determines how property is divided by the court. The court takes into consideration various factors such as education, earning ability, job, financial needs, and health.
It recognizes that marriage is a partnership, and both spouses contribute emotionally, financially, and otherwise to acquiring and maintaining marital property and assets.
When a marriage ends through divorce or legal separation, the principle of equitable distribution seeks to divide the marital property and debts to reflect each spouse’s contributions, needs, and other relevant circumstances.
So, while the idea is to distribute assets fairly, they may be distributed unevenly.
How Community Property Works
Also referred to as marital property, community property encompasses all assets and property acquired during the marriage.
This contrasts to separate property, referring to anything owned before entering the marriage or solely purchased with separate property funds.
Community property can include any of the following:
- Income or financial assets earned or acquired during the marriage
- Joint bank accounts and investments, as well as any other financial accounts established during marriage
- Debts incurred during the marriage
- Items purchased by either spouse
- Funds contributed to a retirement account during marriage
- Separate property r transmuted to marital property (e.g. when partners agree in writing for an asset to be community property rather than separate property)
- Commingling a separate property financial account with community funds earned during marriage
- Paying down the mortgage and/or making capital improvements on a separate property home with income earned during marriage
Community property excludes gifts or inheritances, assets, and debts acquired before marriage, which remain separate property.
How Your Spouse Can Gain an Interest in Separate Property
It may surprise you that your spouse can gain an interest or acquire a legal right or stake in your separate property.
Here are a few examples of how this could happen:
- You transmute some or all of your separate property to the community
- You mix money in bank accounts during marriage. For example, depositing money into your premarital bank account after getting married. This account now holds separate money and community money.
- Your separate property asset increases in value during marriage based on your labor and efforts during marriage. For example, an apartment building you manage and improve during marriage.
- Your personal time, skill, service, industry, and effort during marriage on a separate property asset created a community property interest in that asset. For example, spending time on your separately-owned business after marriage gains an interest for the community.
How Prenups Affect Community Property (and Help Your Marriage)
A prenuptial agreement is the only way to override community property laws effectively.
A prenuptial agreement is a legally binding document you and your spouse-to-be create before marriage. With a prenup, you can precisely define who is entitled to which property in the event of a divorce.
This effectively could supersede the 50/50 rule of community property law and empower you and your spouse to decide how to split your assets in the event of a divorce.
But there’s more to prenups than getting around your state’s default hidden community property rules.
BEFORE getting married, what conversations about MONEY should you have with your partner?
Use this guide to discuss budgets, assets, debts, goals, joints bank accounts and more.Get the guide
One of the many significant benefits of a prenup is that you and your partner engage in meaningful discussions around financial and life goals pertaining to your marriage. These important conversations establish communication, clarity, honesty, and openness as pillars of your relationship.
Thus, a prenup is important for dividing assets in court and for discussing money and your future together.
California is a Community Property State: What Should You Do Next
Regardless of whether you think one methodology is more fair than the other, the fate of your property is wholly determined by the laws of the state where you reside.
For Californians, the only real way to take control of property and asset division during divorce is to lay it all out in a prenuptial agreement.
If you’re headed to the altar and looking for advice on how California law will impact your finances as a couple, don’t hesitate to reach out for a consultation call.
I bring decades of experience in community property law to help couples enter their marriage with peace of mind and get set up for long-term marital success.