Community property
Encyclopedia
Community property is a marital property regime that originated in civil law
jurisdictions and is now also found in some common law
jurisdictions. The states
of the United States
that recognize community property are primarily in the West
; it was inherited from Mexico
's ganancial community system, which itself was inherited from Spanish law (a Roman
-derived civil law
system) and ultimately from the Visigoths. Even Louisiana
, in a rare departure from the Napoleonic code
, was forced to adopt the ganancial community system while under Spanish rule (renamed "community of acquests and gains"), thus ousting the traditional French community of movables and acquests.
In a community property jurisdiction, most property acquired during the marriage
(except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce
, annulment
or death. Joint ownership
is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property. The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family
unit.
Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California
, a 50/50 division of community property is strictly mandated by statute, meaning that the focus then shifts to whether particular items are to be classified as community or separate property. In other jurisdictions, such as Texas
, a divorce court may decree an "equitable distribution" of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property). See division of property
. Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided "equally" while community debt is required to be divided "equitably".
Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is "transmuted" into community property. The rules for this vary from jurisdiction to jurisdiction.
there are nine community property states: Arizona
, California
, Idaho
, Louisiana
, Nevada
, New Mexico
, Texas
, Washington and Wisconsin
. Puerto Rico
allows property to be owned as community property also as do several Indian jurisdictions. Alaska is an opt-in community property state; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust.
If property is held as community property, each spouse technically owns an undivided one-half interest in the property. This type of ownership applies to most property acquired by the husband or the wife during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage. After a divorce, community property is divided equally in some states and according to the discretion of the court in the other states.
It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states (so-called "American Rule" states), income from separate property is also separate. In others (so-called "Civil Law" states), the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state.
Community property has certain federal tax implications, which the Internal Revenue Service
discusses in its Publication 555. In general, community property may result in lower federal capital gain taxes
after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called "community property with right of survivorship." This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or another form of concurrent ownership) vary from state to state.
Because community property law affects the property of all married persons in the states in which it is in effect, it can have catastrophic consequences upon dissolution of the marriage from the perspective of the spouse forced to share a valuable asset which he or she thought was separate property. Indeed, one sign of community property's importance is that the states of Arizona, California, Idaho, Louisiana, and Texas have made it a mandatory subject on their bar examination
s, so that all lawyers in those states will be able to educate their clients appropriately. Consumers who are considering how to hold property during marriage should either research reliable legal source materials, or consult with a family lawyer, an estate planning lawyer, a Certified Public Accountant
, or an Enrolled Agent
.
. Case law and applicable formulas vary among community property jurisdictions to apply to these and many other situations, to determine and divide community and separate property interest in such a residence and other property.
Community property issues often arise in divorce proceedings and disputes after the death of one spouse. These disputes can often be avoided by proper estate planning during the spouses' joint lifetime. This may or may not involve probate
proceedings. Property acquired before marriage is separate and belongs to the spouse who acquired it. Property acquired during marriage is presumed to belong to the community estate except if acquired by inheritance or gift, or by exchange for other separate property. This definition leads to numerous issues that can be difficult to ascertain. For instance, where a spouse owns a business when marrying, it is clearly separate at that time. But if the business grows during the marriage, then what of the additional property acquired during marriage? Do they not result from labor of the spouses? Were some of the funds that were used to pay for the property community funds while a portion of the funds were separate property?
Community property may consist of property of all types, including real property ("immovable property" in civil law jurisdictions) and personal property ("movable property" in civil law jurisdictions) such as accounts in financial institutes, stocks, bonds, and cash.
A pension
or annuity
may have first been acquired before a marriage. But if contributions are made with community property during marriage, then proceeds are partly separate property and partly community property. Upon divorce or death of a party to the marriage, there are rules for apportionment.
Options
are also difficult to ascertain. A stock
option is a right to purchase shares
of a company at a fixed price. Companies with growth potential sometimes award stock options as compensation to employees, during times when there is not enough money to pay a suitable salary. By accepting a stock option for compensation, an employee invests his or her own trust in the belief that he or she will help make the company acquire a higher value. Thereafter, the employee works and contributes value to the company. If the company later acquires a higher share valuation, then the employee may "cash in" his options by selling them at the fair market value. The employee's trust in this future value motivates his work without immediate compensation. That effort has value. If the marriage is terminated before the shares are cashed in, then the parties must decide how to apportion the community property portion of the options. This can be difficult. Case law precedents are not yet available for all situations involving stock options.
Typically, such property is treated as if it were community property at the time of divorce or death of a spouse, but in California, at least, property acquired while married and domiciled in a non-community property jurisdiction does not become community property just because the married parties move to a community property jurisdiction. It is the new event of divorce or death while domiciled in the community property state that allows that state to treat such property as quasi-community property. , only Washington, California, New Mexico and Arizona have such laws.
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
jurisdictions and is now also found in some common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdictions. The states
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
that recognize community property are primarily in the West
Western United States
.The Western United States, commonly referred to as the American West or simply "the West," traditionally refers to the region comprising the westernmost states of the United States. Because the U.S. expanded westward after its founding, the meaning of the West has evolved over time...
; it was inherited from Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
's ganancial community system, which itself was inherited from Spanish law (a Roman
Roman law
Roman law is the legal system of ancient Rome, and the legal developments which occurred before the 7th century AD — when the Roman–Byzantine state adopted Greek as the language of government. The development of Roman law comprises more than a thousand years of jurisprudence — from the Twelve...
-derived civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
system) and ultimately from the Visigoths. Even Louisiana
Louisiana
Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state in the U.S. with political subdivisions termed parishes, which are local governments equivalent to counties...
, in a rare departure from the Napoleonic code
Napoleonic code
The Napoleonic Code — or Code Napoléon — is the French civil code, established under Napoléon I in 1804. The code forbade privileges based on birth, allowed freedom of religion, and specified that government jobs go to the most qualified...
, was forced to adopt the ganancial community system while under Spanish rule (renamed "community of acquests and gains"), thus ousting the traditional French community of movables and acquests.
In a community property jurisdiction, most property acquired during the marriage
Marriage
Marriage is a social union or legal contract between people that creates kinship. It is an institution in which interpersonal relationships, usually intimate and sexual, are acknowledged in a variety of ways, depending on the culture or subculture in which it is found...
(except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce
Divorce
Divorce is the final termination of a marital union, canceling the legal duties and responsibilities of marriage and dissolving the bonds of matrimony between the parties...
, annulment
Annulment
Annulment is a legal procedure for declaring a marriage null and void. Unlike divorce, it is usually retroactive, meaning that an annulled marriage is considered to be invalid from the beginning almost as if it had never taken place...
or death. Joint ownership
Joint ownership
Joint ownership refers to:* Housing equity partnership.* Jointly-owned photovoltaic plant....
is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property. The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family
Family
In human context, a family is a group of people affiliated by consanguinity, affinity, or co-residence. In most societies it is the principal institution for the socialization of children...
unit.
Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, a 50/50 division of community property is strictly mandated by statute, meaning that the focus then shifts to whether particular items are to be classified as community or separate property. In other jurisdictions, such as Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
, a divorce court may decree an "equitable distribution" of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property). See division of property
Division of property
Division of property, also known as equitable distribution, is a judicial division of property rights and obligations between spouses during divorce...
. Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided "equally" while community debt is required to be divided "equitably".
Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is "transmuted" into community property. The rules for this vary from jurisdiction to jurisdiction.
Jurisdictions
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
there are nine community property states: Arizona
Arizona
Arizona ; is a state located in the southwestern region of the United States. It is also part of the western United States and the mountain west. The capital and largest city is Phoenix...
, California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, Idaho
Idaho
Idaho is a state in the Rocky Mountain area of the United States. The state's largest city and capital is Boise. Residents are called "Idahoans". Idaho was admitted to the Union on July 3, 1890, as the 43rd state....
, Louisiana
Louisiana
Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state in the U.S. with political subdivisions termed parishes, which are local governments equivalent to counties...
, Nevada
Nevada
Nevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its...
, New Mexico
New Mexico
New Mexico is a state located in the southwest and western regions of the United States. New Mexico is also usually considered one of the Mountain States. With a population density of 16 per square mile, New Mexico is the sixth-most sparsely inhabited U.S...
, Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
, Washington and Wisconsin
Wisconsin
Wisconsin is a U.S. state located in the north-central United States and is part of the Midwest. It is bordered by Minnesota to the west, Iowa to the southwest, Illinois to the south, Lake Michigan to the east, Michigan to the northeast, and Lake Superior to the north. Wisconsin's capital is...
. Puerto Rico
Puerto Rico
Puerto Rico , officially the Commonwealth of Puerto Rico , is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.Puerto Rico comprises an...
allows property to be owned as community property also as do several Indian jurisdictions. Alaska is an opt-in community property state; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust.
If property is held as community property, each spouse technically owns an undivided one-half interest in the property. This type of ownership applies to most property acquired by the husband or the wife during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage. After a divorce, community property is divided equally in some states and according to the discretion of the court in the other states.
It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states (so-called "American Rule" states), income from separate property is also separate. In others (so-called "Civil Law" states), the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state.
Community property has certain federal tax implications, which the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
discusses in its Publication 555. In general, community property may result in lower federal capital gain taxes
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called "community property with right of survivorship." This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or another form of concurrent ownership) vary from state to state.
Because community property law affects the property of all married persons in the states in which it is in effect, it can have catastrophic consequences upon dissolution of the marriage from the perspective of the spouse forced to share a valuable asset which he or she thought was separate property. Indeed, one sign of community property's importance is that the states of Arizona, California, Idaho, Louisiana, and Texas have made it a mandatory subject on their bar examination
Bar examination
A bar examination is an examination conducted at regular intervals to determine whether a candidate is qualified to practice law in a given jurisdiction.-Brazil:...
s, so that all lawyers in those states will be able to educate their clients appropriately. Consumers who are considering how to hold property during marriage should either research reliable legal source materials, or consult with a family lawyer, an estate planning lawyer, a Certified Public Accountant
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
, or an Enrolled Agent
Enrolled Agent
An Enrolled Agent is a tax professional recognized by the United States federal government to represent taxpayers in dealings with the Internal Revenue Service...
.
Issues
Often a new couple acquires a family residence. If the marriage terminates in subsequent years, there can be difficult community property problems to solve. For instance, often there is a contribution of separate property; or legal title may be held in the name of one party and not the other. There may also have been an inheritance or substantial gift from the family of one of the spouses during the marriage, whose proceeds were used to buy a property or pay down a mortgageMortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
. Case law and applicable formulas vary among community property jurisdictions to apply to these and many other situations, to determine and divide community and separate property interest in such a residence and other property.
Community property issues often arise in divorce proceedings and disputes after the death of one spouse. These disputes can often be avoided by proper estate planning during the spouses' joint lifetime. This may or may not involve probate
Probate
Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will. A probate court decides the validity of a testator's will...
proceedings. Property acquired before marriage is separate and belongs to the spouse who acquired it. Property acquired during marriage is presumed to belong to the community estate except if acquired by inheritance or gift, or by exchange for other separate property. This definition leads to numerous issues that can be difficult to ascertain. For instance, where a spouse owns a business when marrying, it is clearly separate at that time. But if the business grows during the marriage, then what of the additional property acquired during marriage? Do they not result from labor of the spouses? Were some of the funds that were used to pay for the property community funds while a portion of the funds were separate property?
Community property may consist of property of all types, including real property ("immovable property" in civil law jurisdictions) and personal property ("movable property" in civil law jurisdictions) such as accounts in financial institutes, stocks, bonds, and cash.
A pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
or annuity
Life annuity
A life annuity is a financial contract in the form of an insurance product according to which a seller — typically a financial institution such as a life insurance company — makes a series of future payments to a buyer in exchange for the immediate payment of a lump sum or a series...
may have first been acquired before a marriage. But if contributions are made with community property during marriage, then proceeds are partly separate property and partly community property. Upon divorce or death of a party to the marriage, there are rules for apportionment.
Options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
are also difficult to ascertain. A stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
option is a right to purchase shares
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
of a company at a fixed price. Companies with growth potential sometimes award stock options as compensation to employees, during times when there is not enough money to pay a suitable salary. By accepting a stock option for compensation, an employee invests his or her own trust in the belief that he or she will help make the company acquire a higher value. Thereafter, the employee works and contributes value to the company. If the company later acquires a higher share valuation, then the employee may "cash in" his options by selling them at the fair market value. The employee's trust in this future value motivates his work without immediate compensation. That effort has value. If the marriage is terminated before the shares are cashed in, then the parties must decide how to apportion the community property portion of the options. This can be difficult. Case law precedents are not yet available for all situations involving stock options.
Quasi-community property
Quasi-community property is a concept recognized by some community property states. For example, in California, quasi-community property is defined by statute as"all real or personal property, wherever situated, acquired before or after the operative
date of this code in any of the following ways:
(a) By either spouse while domiciled elsewhere which would have been community property if the spouse who acquired the property had
been domiciled in this state at the time of its acquisition.
(b) In exchange for real or personal property, wherever situated, which would have been community property if the spouse who acquired
the property so exchanged had been domiciled in this state at the time of its acquisition.
Typically, such property is treated as if it were community property at the time of divorce or death of a spouse, but in California, at least, property acquired while married and domiciled in a non-community property jurisdiction does not become community property just because the married parties move to a community property jurisdiction. It is the new event of divorce or death while domiciled in the community property state that allows that state to treat such property as quasi-community property. , only Washington, California, New Mexico and Arizona have such laws.
See also
- Van Camp accountingVan camp accountingVan Camp accounting is one of the two methods California community property law uses to deal with community funds and/or labor is used to enhance the value of separate property....
, one of two methods used in California for determining the community property interest in a separate business, where one of the spouses has contributed labor to the business - Pereira accountingPereira accountingPereira accounting is one of the two manners in California community property law that explains how to deal with community funds and/or labor is used to enhance the value of separate property. To calculate, courts will add the original principal amount of the business which is separate property to...
, the other such method