The Definition and Purpose of Community Property
Where you live can determine who owns what
Community property is a type of joint ownership of assets between married couples. It's the law in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Married couples can elect to have some or all of their property treated as community property in Alaska by stating so in a written contract, but this type of ownership is not mandatory as it is in the other states.
What Does Community Property Include?
The laws in community property states vary in their finer details, but community property means that all assets purchased or acquired by a couple during their marriage are owned equally by both of them. It is the case regardless of how the asset is titled.
Gifts and inheritances are an exception. If someone specifically gives something to just one spouse, that property is his alone, and if a spouse inherits an asset, it's hers alone, regardless of whether they're married at the time.
Earnings, income, and wages are also considered community property. John would own half of Mary's earnings and income and vice versa.
Community Property Law Includes Debts
Debts fall under the umbrella of community property, too. They're equally owed by both spouses regardless of which of them incurred them. If John runs up a $10,000 credit card bill in his own name then fails to make the payments, the lender can pursue Mary for the money even to the extent of garnishing her wages.
A Couple's Separate Property
Gifts and inheritances are referred to as a couple's separate property, as are assets that each spouse owned or acquired before the date of the marriage. If John owned a home before he married Mary, she isn't considered an equal owner of that property because its acquisition predated the marriage—unless it becomes "transmuted" into community property. It can occur if community money earned during the marriage is ever used to maintain the asset, such as to make repairs or to pay insurance premiums.
Community Property and Divorce
When a couple divorces in a community property state, each spouse is generally entitled to a half share of their marital or community property. Likewise, each spouse would be responsible for an equal share of all marital debts.
But divorce laws can vary somewhat among the community property states, so consult with an attorney who practices in your state if you want to know the state's rules. For example, a prenuptial agreement can override community property law in California—if spouses consent to another arrangement in writing and their agreement meets all the rules for a qualified prenup, their property and debts would be divided according to the agreement, not community property law.
Other states, sometimes called "equitable distribution" states, divide marital property and debts in a way that seems equitable or fair to the judge or by agreement between spouses. The division might be 60/40 or even 70/30, whereas it's typically 50/50 in community property states absent an agreement providing for some other division.
Community Property and Death
What happens to community property when one spouse dies? Again, it depends to some extent on the state. If the couple didn't make an estate plan, the intestacy laws of the state where they lived would govern who gets what. These laws tend to vary a great deal in community property states.
For example, a surviving spouse would inherit all the community property in Texas if the couple had children together. But if the spouse who died had children from a previous marriage, those children would receive their parent's 50-percent share of the community property. The surviving spouse would receive only her own 50-percent share.
A married individual living in a community property state can usually only pass his separate property to someone other than his spouse in his will or another estate plan. And, as is the case with divorce, a couple can make other provisions in a valid premarital agreement in many community property states.