Community Property Assets 101

What is community property? Why is it important?  What does it mean in the state of California?

What is community property?

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.

Community property involves all of the property, debts and assets that a couple accrues over the life of the marriage. However, there may be some items that are not divisible. Separate property, according to Forbes, is not eligible for division in a California divorce case and may include the following:

  • Inheritance that is given to either party before or during the marriage
  • Any property that a person owns before entering into the marriage
  • Gifts that are given to either party by a third person, such as family member or friend
  • Compensation that is awarded to either party in a personal injury case

It is important to understand that separate property can change into marital property if it is combined with property and/or assets belonging to the other spouse. If a spouse deposits his or her inheritance money into a bank account that is shared with the other spouse, it may become marital property.

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 actually 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.

This 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 exact rules there. 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 will 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.

Legal assistance from an attorney

Many people find it difficult to navigate through the death or divorce process in California on their own, especially when emotions are running high. If you want to ensure that you are getting everything you deserve in your divorce settlement, you may want to speak to an attorney regarding your rights.