Moving to a Community Property State? Here’s What Couples Should Know

You might have heard that some states, like Texas or California, have community property laws. You might have wondered what that was all about.

A few other states follow community property law, too. They are Arizona, Nevada, and New Mexico, along with Louisiana, Idaho, Washington, and Wisconsin.

Considering moving to or from any of those states? Then here are some things you should know.

How Does Community Property Work?

We typically think of property as owned by the person(s) named on the deed. But in a community property state, the assets and debts married people acquire while they’re a couple belongs to both of them. They hold equal shares in their property, no matter who is or isn’t named on the title. Should they ever divorce, they’ll evenly split their combined assets and debts.

Now, a community property state treats whatever you owned before you got married as your separate property, which you’d keep after a divorce — unless you agree to quitclaim it.

But in the community property states:

• Couples buy and own things as a unit called a marital community.

• Married individuals can sell or finance their home on behalf of the couple. 

• Whatever you buy as a married individual belongs to both of you. This is the case even if only one of your names appears on the deed, and even if only one of you took on the mortgage loan.

That’s right. What you acquired as a married person is community property — even if your name alone is on the title.  

So, a divorce divides up and distributes community property. And each individual keeps their own separate property. So, you’ll want to be able to identify separate property in case of a breakup.

What about after one person dies? Community property goes through probate. Co-owners need to know this, because it will impact their plans for passing property on. You may leave your share of community property in your will. This means your surviving life partner and the person you name in your will then become co-owners (vested as tenants in common).

If there is no will when the first co-owner passes away, then the surviving co-owner will receive the property of the one who died first.

Are There Ways Around Community Property State Laws?

For starters, a few states have a special form of community property, which is not probated when one or the other partner dies. This is called community property with rights of survivorship. Where permitted by law, this vests the deed in the surviving co-owner when one dies.

Turns out another way to keep property separate is to inherit it or receive it as a gift for no consideration (that is, zero payment). In community property states, assets received by one spouse alone as an inheritance, as a gift for zero payment, or even as one spouse’s personal injury award remains the sole and separate property of the recipient. So, if a grandparent leaves you something in a will, and you don’t quitclaim your sole ownership into both your names, that’s your separate property.

When a couple is parted, through divorce or death, one’s ownership of separate property could be challenged. A home acquired in marriage is legally presumed to be community property. You must overcome that presumption to show it’s your sole property. Got it as a gift to you personally? You’ll need to show it was freely given, for zero money or services in return.

After marriage, you can buy a home and designate it as separate property. Also, couples can opt out of community property ownership, if both parties sign a pre-nup saying whatever one party earns and buys while married is theirs to keep after a divorce.

There’s yet another way: deed the home into a living trust. After your death, your chosen beneficiary’s rights become irreversible. No probate is needed for the assets you deed to the trust.

If you are considering one or more of these options, consult an attorney in your state for situation-specific guidance.

Sometimes, People Turn Sole Property Into Community Property Without Knowing It

Sole property can turn into community property. Here are examples in which separate property can become marital:

• When it’s kept in a joint account, an asset becomes “transmuted” from sole and separate to a shared asset.

• When the non-titled spouse increases the value of an asset, the extra value added during the marriage becomes a shared asset.

Outside of community property states, in contrast, ownership is simply as your deed describes it. That said, five states offer opt-in community property. The five states are Alaska, Florida, Kentucky, South Dakota, and Tennessee. In all of them, married couples can create community property trusts.

And a growing number of couples in these states do opt for community property trusts — for the tax benefits. Of course, tax breaks aren’t the only factor in a decision to opt into community property ownership. Speak with an experienced estate planner at your family law firm to learn more.

As the Law Can Get Tricky, Legal Expertise Matters

We offer this discussion to get readers oriented if they’re making plans to buy into (or exit) a community property state. But this article isn’t legal advice, and shouldn’t be taken as such.

An attorney with experience in family and/or estate law can explain property rights in your state, and how they apply to your unique facts and circumstances. That includes making plans for all of your assets — not just the home. An attorney can also help strengthen your legal documents so they’ll stand up to challenges, and do just what you intend for them to do.

In a recent Dallas Morning News column, accredited estate planner Virginia Hammerle offered a perfect example of why legal know-how matters. Michael owned land in Texas, a community property state. Michael’s name alone was on the deed and the mortgage. From everything we’ve said above, you’d likely assume a court would say that land was marital property. But no. A court determined it belonged solely to Michael. Why?

Michael and his spouse signed a deed of trust for the home loan. That document referred to the land as Michael’s “sole and separate property” and the deed “not joined in” by his spouse, which overcame the presumption that a piece of property is marital asset. By signing off on that deed of trust, the spouse was, as the court saw it, giving her interest to Michael.

A lawyer can go through that kind of precedent and guide the wording of your real estate documents so they carry out your intentions. Knowing which assets are and aren’t separately owned can be tricky.