Each state has its own set of rules when it comes to marital or community property. Most states operate under the common law system of property ownership, which makes it easy to understand which spouse owns what: If your name only is on the account, deed, title, or registration, then that asset is yours regardless of how it was acquired or who initially paid for it.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin operate under community property guidelines. And Tennessee, Alaska, Kentucky, and Florida allow residents to opt into a community property system.
Community property refers to property acquired by one or both spouses during the marriage. One of the fundamental features of community property is that an asset’s title doesn’t indicate ownership. So what’s the legal difference between marital property and separate property in community property states? Basically, separate property is defined as property owned by either spouse prior to entering into the marriage or inherited during the marriage. Absent a prenuptial agreement, any income or asset acquired during the marriage by either spouse is considered marital property.
Exceptions to the rules? A gift received, say a family heirloom given by your grandmother, can be considered separate property. So can payment received from a personal injury judgment. Each state has a method for determining separate property versus marital or community property, so check to see how yours makes such decisions.
Long-term implications
Whether assets are classified as community property or separate property also can have an impact on estate planning, income, estate tax planning, and creditors’ rights. For estate planning, each spouse is allowed to dispose of one-half of community property at death. Creditors can make claims against shared assets if either party owes a debt — even if your spouse owes the debt, your community property is considered liable.
Sometimes a forensic accountant is needed to review asset statements, debt statements, money flows, and tax returns to help you follow the money trail if separate assets have been commingled with community property. It’s difficult to prove the separate nature of those assets if a marriage is dissolving. You may wish you had kept your separate property separate.
Focusing on the financial impact of decisions made during a separation is difficult because the emotional impact on you and your spouse is real. The division of significant assets — homes, rental property, retirement assets, cash or brokerage accounts, stock options, closely held businesses, and professional licenses — can be confusing and complex.
If your spouse was granted stock options, deferred compensation, or a retirement plan through an employer while you were married, the assets contributed to the retirement plan were likely invested and grew during the marriage. As such, each party is entitled to the growth of the assets — or their respective share of losses.
If your spouse owns a home acquired during the marriage — in joint title or if joint assets were used to pay the mortgage and expenses of the home — then it’s considered marital property. A lot of consideration goes into property division, and many states handle these matters in their own way.
This is just a summary of what can be a very complicated situation. There are subtle but important differences even among the community property states. Seek attorneys and financial professionals who are well-versed in this area of state law.
We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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