Any property, whether real or personal, that is owned equally by both spouses is marital property, or community property in states that follow community property laws. When spouses legally separate or divorce, community property will be divided equally between the two parties.
This is different from separate property, which under separate property laws, is individually owned by one of the spouses and will remain in their sole possession following the divorce. Simply stated, property that is obtained by spouses during their marriage is classified as community property.
It is important to note, however, that only a minority of states follow the community property rule. The remainder of the states divide marital property according to the principles of equitable distribution.
In community property states, most of the following would be considered community property:
- Property that was bought using communal funds during a valid marriage;
- Non-community property that is labeled as community property in a valid written agreement between the spouses;
- Non-community property that has been commingled or merged with marital property such that it cannot be distinguished as an individual’s property; and
- Property that both of the spouses’ names appear on the title.
What Type of Property Is Commonly Referred to as Separate Property?
As noted above, the categories of property in the context of divorce depend on the laws of the state. In general, the following and common examples of separate property:
- Inheritances and gifts, such as property acquired through a will;
- Heirlooms, typically valuable objects that are kept in the family, for example, jewelry;
- Chattels, or property, used entirely or principally for business purposes;
- Property obtained under a trust;
- The property the partners proclaim to be separate under an agreement;
- Property obtained before the marriage began; and
- Property that was acquired using the proceeds of separate property and not intended for the use or advantage of both spouses.
One way spouses can define what they want to keep as separate property is to declare them in an agreement. Using an agreement, the parties can define any explicit property items or assets that they do not want to be classified as shared property.
This is typically done using a prenuptial agreement. It is important for the parties to remember that they must also treat the property as separate for it to continue to be so.
For example, if the spouses declare that a home one of the spouses owned prior to the marriage as separate property and the spouses receives income that is declared separate income, it cannot be commingled with community property or income.
What Happens if We Move from a Community Property State to a Non-Community Property State?
Because some states operate under community property rules while other states do not, moving from state to state may have an effect on a married couple’s property, depending on the laws of their new state of domicile. In general, however, property that is acquired during the marriage as community property in a community property state is not automatically converted into non-community property when the parties move to a common law state.
The community property will retain its characterization when the couple moves from a community property state to a non-community property state. However, if community property is exchanged for other property while in the new state of residence, the property that is obtained is typically considered to be community property.
In addition, if the community property is sold and the money obtained is used for a new purchase, that purchase will also be considered community property.
What About When Moving from a Non-Community Property to a Community Property State?
If property is obtained by a spouse in a non-community property state, that property will be considered separate property. If that separate property is brought with the spouses when they move to a community property state, it will remain characterized as separate property.
In other words, separate property of a spouse will not be automatically converted into community property simply because the couple moves out of a non-community property state into a community property state. If that separate property is exchanged or sold for money, it will likely remain separate property of the owning spouse, so long as it is not commingled with other marital property.
What Is Quasi-Community Property?
In some community property states, there are also rules regarding quasi-community property. Under marital property laws, quasi-community property is property that is obtained by spouses who are living in a common law state that would have been shared property if they were living in a community property state.
Quasi-community property is treated as community property when the spouses move into a community property state. Separate property and community property will retain their characterization when the couple moves to a state with different marital property laws.
An individual should check their local laws or consult with a local attorney to determine if quasi-community principles apply. One of the main issues that arises when spouses move to a different state is the inheritance tax based on the death of one of the spouses.
Death taxes may differ by state and according to whether their property is considered community or separate property.
What Happens to Quasi-community Property in a Divorce?
States that follow the community property division method include:
- Arizona;
- California;
- Idaho;
- Louisiana;
- Nevada;
- New Mexico;
- Texas;
- Washington; and
- Wisconsin.
Under this system, all property including real property, income, and any other earnings acquired during a marriage are deemed to be equally owned by each of the spouses. When a couple divorces, all of their community marital property will be divided 50/50.
In a divorce proceeding, all property that is deemed quasi-community property will be treated as though it is community property for division purposes. This means that, even if property was acquired out of state, it will be divided 50/50 when the divorce is finalized.
Do Creditors Have Access to Quasi-community Property?
In certain cases, yes, creditors may have access to quasi-community property. In general, quasi-community property law provides that, during a marriage, any such property is treated as community property.
This classification as community property means that a creditor of a non-acquiring spouse may place a lien on and otherwise access the acquiring spouse’s separate assets until the marriage is dissolved or one of the spouses passes away. This rule is controversial and, as such, some states have enacted legislation that protects the spouses if this type of situation arises.
Can I Change Separate Property into Community Property?
For numerous different reasons, spouses may want to change the status or ownership of their community or separate property. It is common to re-characterize property for convenience or beneficial tax purposes.
In general, property may be changed from separate property to community property using a prenuptial or postnuptial agreement or a legal process called transmutation.
What Is a Transmutation?
Transmutation is the process of changing the character of marital property from separate property to communal property or communal property to separate property. Separate property may be transmuted to community property by using one of the following methods:
- Agreement;
- Jointly titling property in the name of both spouses; or
- Commingling separate assets with community assets, such as combining separate property with marriage property, for example, putting income earned before the marriage into a joint banking account.
Do I Need a Lawyer for Community Property Issues?
If you and your spouse are moving from a community property state to a non-community property state, you may wish to consult with a family lawyer to determine how this may affect your assets. Each state has different property laws that may result in different outcomes, depending on your state of residence.
If you are in the process of a legal separation or divorce and you anticipate disagreements regarding the distribution of your assets, your lawyer can help. A divorce lawyer can help you plan for your future much like an estate lawyer can help you plan the future of your estate.
