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OVERVIEW
Community property is a method of defining the ownership of property acquired during marriage where all earnings during marriage and all property acquired with those earnings are owned in common and all debts incurred during marriage are the responsibility of both spouses.Community Property States
Management and Control of Marital Property
Even in community property states, a spouse can own separate property. In general, separate property refers to those assets owned prior to marriage and property received by gift or inheritance. It is possible for an asset owned by one spouse prior to the marriage to remain the separate property of that spouse during the marriage. In addition, if a spouse's separate property is sold during the marriage and the proceeds are invested in a new asset during the marriage, that new asset is separate property if it can be traced back to its separate property source. Thus, when referring to assets “acquired” during marriage as being community property, the primary focus is on assets acquired through the efforts of the spouses during the marriage.
Disposition of Community Property on Death of First Spouse
Marriages terminate by death or divorce. This article does not directly address the division of community property on divorce. Instead, this article will focus on the division and distribution of the community property assets on the death of the first spouse, and particularly the distribution of beneficiary designation assets on the death of the first spouse.
Without a prenup:
The United States has nine community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Four other states have adopted optional community property systems. Alaska allows spouses to create community property by entering into a community property agreement or by creating a community property trust. In 2010, Tennessee adopted a law like Alaska's and allows residents and non-residents to opt into community property through a community property trust. Kentucky recently adopted an optional community property system in 2020, allowing residents and non-residents to establish community property trusts. Finally, Florida adopted a law in 2021, allowing citizens and noncitizens to establish community property trusts.
Community Property versus Equitable Division
Equitable distribution is the most common system of property division, used in 41 of the 50 states. Courts in equitable division states will split all assets, earnings, personal property, and debts between the spouses in a division that is fair (in the eyes of the judge) but not equal. Rather than awarding each item to a spouse as a whole, the court may order the sale of a certain item and then split the proceeds of the sale fairly between the spouses.
Sometimes, but not usually, the court may order a spouse to give separate property to the other spouse in compensation for an unequal distribution of their marital property. Judges in some states may start with the presumption that marital property should be divided equally, but they may stray from an equal division in the interests of fairness.
Community Property Issues
Even in community property states, a spouse can own separate property. In general, separate property refers to those assets owned prior to marriage and property received by gift or inheritance. It is possible for an asset owned by one spouse prior to the marriage to remain the separate property of that spouse during the marriage. In addition, if a spouse's separate property is sold during the marriage and the proceeds are invested in a new asset during the marriage, that new asset is separate property if it can be traced back to its separate property source. Thus, when referring to assets “acquired” during marriage as being community property, the primary focus is on assets acquired through the efforts of the spouses during the marriage.
Disposition of Community Property on Death of First Spouse
Marriages terminate by death or divorce. This article does not directly address the division of community property on divorce. Instead, this article will focus on the division and distribution of the community property assets on the death of the first spouse, and particularly the distribution of beneficiary designation assets on the death of the first spouse.
The marital relationship terminates when the first spouse dies. At that time, the community property partitions into two equal shares: one share owned by the deceased spouse and the other share owned by the surviving spouse. The deceased spouse's one-half interest in the community property assets distributes upon his death to a new owner or owners. The surviving spouse is entitled to keep her one-half interest in the community property assets.
Even if a particular asset was titled solely in the deceased spouse's name at death, if it is a community property asset, the surviving spouse owns one-half of the asset in her own right and, when providing for the disposition of the asset, the managing spouse should consider his spouse's ownership interest. If the deceased spouse fails to do so and disposes of his spouse's ownership interest in the community property asset at death, the surviving spouse has the right to recover her ownership interest in the asset.
Even if a particular asset was titled solely in the deceased spouse's name at death, if it is a community property asset, the surviving spouse owns one-half of the asset in her own right and, when providing for the disposition of the asset, the managing spouse should consider his spouse's ownership interest. If the deceased spouse fails to do so and disposes of his spouse's ownership interest in the community property asset at death, the surviving spouse has the right to recover her ownership interest in the asset.
Taxes and Community Property
The United States Supreme Court's decision United States v. Mitchell noted that in a community property regime, each spouse may file a separate federal income tax return, but each spouse's return must report one-half of the community income. In addition, Mitchell says “with respect to community income, as with respect to other income, federal income tax liability follows ownership.” Community Property and Prenuptial Agreements
A prenuptial agreement in a community property state is a contract that allows couples to customize how their assets and liabilities are divided in the event of divorce or separation. a prenuptial agreement is important because of its effects disposition of assets.
Without a prenup:
Everything earned during marriage is considered joint and will be split.
With a prenup: Couples can alter state law and divide their assets as they wish.
It is common for engaged couples to feel uncomfortable discussing divorce and prenuptial agreements. It is viewed as a taboo subject, because no new couple wants to acknowledge the fact that they may at one point decide to divorce. Despite this, a detached and practical view of the subject, because it is imperative that you protect yourself, your family, and your finances.
- Inheritance rights: Couples can address inheritance rights.
- Property division: Couples can specify how property acquired during the marriage will be divided.
- Asset protection: Couples can outline how assets and debts acquired before the marriage will be divided.
- Spousal support: Couples can decide how spousal support will be paid. Though the agreement can determine whether one spouse will pay alimony (spousal support) to the other in case of divorce, and if so, how much and for how long. However, prenups cannot completely waive the right to spousal support as the court retains the discretion to overrule such provisions if they are deemed unfair or unconscionable.
I'll use examples of the effect of earnings on whether a prenuptial agreement would be beneficial for a party in a potential divorce. Groom A has inherited wealth and properties that are held in corporate trust and maintains his lifestyle through dividends of about $2 million annually. Groom B is a actor and producer who has amassed $50 million but who also earns about $20 million every year. Who would need a prenup? Groom A or B? Oddly, Groom A might not even need a prenuptial agreement. Why?
Although he is a man of means like Groom B, he doesn't have the burden of the high annual income that would make a prenuptial agreement essential. His property is separate and even if he would be required to provide spousal and child support out of his separate property in the event of a divorce it would be in keeping with his $2 million income and his property before the marriage is not subject to community division. Assets and debts matter in Groom A's case and the support obligations are pre-limited. Groom B on the other hand, due to his high earnings would benefit from not having his marital property subject to community property division.
Cases of Note
Blanchard v. Blanchard, 108 Nev. 908, 839 P.2d 1320 (1992)
Former wife's allegations that former husband made intentional misrepresentations in property settlement agreement concerning existence and valuation of certain community assets were sufficient to state claim for rescission of agreement due to alleged misrepresentations.
In re Marriage of Huntley, 10 Cal. App. 5th 1053, 216 Cal. Rptr. 3d 904 (2017)
To be valid, even an agreement to divide community property equally must comply with the statute requiring a written agreement of the parties or an oral stipulation of the parties in open court.
The Law
California Family Code
§ 760 Community Property in General
§ 1100. Community Personal Property; Management and Control; Restrictions on Disposition
§ 1101. Claim for Breach of Fiduciary Duty; Court Ordered Accounting; Addition of Name of Spouse to Community Property; Limitation of Action; Consent of Spouse Not Required;
§ 1102. Community Real Property; Spouse's Joinder in Conveyances; Application of Section; Limitation of Actions
§ 1103. Management and Control of Community Property; One or Both Spouses Having Conservator of Estate or Lacking Legal Capacity
§ 1100. Community Personal Property; Management and Control; Restrictions on Disposition
§ 1101. Claim for Breach of Fiduciary Duty; Court Ordered Accounting; Addition of Name of Spouse to Community Property; Limitation of Action; Consent of Spouse Not Required;
§ 1102. Community Real Property; Spouse's Joinder in Conveyances; Application of Section; Limitation of Actions
§ 1103. Management and Control of Community Property; One or Both Spouses Having Conservator of Estate or Lacking Legal Capacity
§ 2550. Division of Property
§ 4338. Spousal Support
For Family Law in Los Angeles and San Diego Counties
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