Community Property

Community property, also commonly known as marital property, is a state-level law that delegates a married person's assets. Under the community property laws, any property, real or personal, income earned or acquired by either partner while being married is considered marital property. Therefore, it belongs equally to both married partners.

Irrespective of which spouse earns or spends the cumulative earnings, spouses in a marriage own and owe equally. In most jurisdictions, the share of each spouse is strictly 50%. However, in some other jurisdictions, a judge might decide the share among the spouses. In total, nine states practice the law actively.

Community or marital property is a legal system in the United States that governs or overlooks the ownership and sharing of properties between spouses of marriage within specific jurisdictions. As per these rules, most community property income and assets acquired by any spouse during the marriage are counted as joint property.

Joint ownership is irrespective of who acquired or earned it. The earnings or acquisitions could be from investments, employment, real estate, and others. The law exists in nine states of the United States- Idaho, California, Arizona, Nevada, Louisiana, Texas, New Mexico, Wisconsin, and Washington. While most of the rules are common, there are a few specifications that vary based on jurisdiction. 

For instance, in states like California, Arizona, and Texas, each spouse has 50-50 ownership of marital property assets unless there is an agreement stating otherwise. If the couple applies for divorce or one of them passes away, the marital property is generally split between spouses. However, the treatment could be very different if there is an agreement of negotiation, prenuptial or postnuptial. 

Assets and liabilities are also treated as common responsibilities, as assets are considered equal gains. Therefore, irrespective of who incurred the debt, both spouses in a marriage are equally responsible for settling it.

While these laws are common at the foundation level, there are changes according to jurisdiction. Therefore, married couples need to stay updated about the laws and the changes that they are subject to. Moreover, it is also a brilliant idea to draft a prenuptial or postnuptial agreement to customize the division according to the best judgment of the couple. 

Community property management is not a concept that was invented in the 21st century. There are traces of such a system in ancient Roman society, where people believed that a family was a single social unit. Moreover, various other ancient accounting systems also recognized this concept. 

After the dramatic fall of the Roman empire, the Spanish Goths worked towards legal unification of the world. As a result, The Code of Euric and The Code of Fuerzo Juzgo were formed. Both these codes specified the laws relating to husband and wife being joint owners of properties. 

Insured by rules curated by Spanish decision-makers, the concept of marital property was brought to the United States. To give context on the time frame, the concept came to California, for instance, in 1849.

While community property laws have gained much popularity in the last decade or so, not all states exercise them. The law is followed in nine states in the United States. They are:

• Idaho
• California
• Arizona 
• Nevada
• Louisiana
• Texas
• New Mexico
• Wisconsin; and 
• Washington

Even though the law is practiced in these nine states, there are several differences in the way they are implemented. For instance, out of the nine states, four states recognize and accept some forms of domestic partnership instead of marriage to qualify for marital property. The other five do not have any such provisions. 

Alaska, Tennessee, and South Dakota allow optional community property systems. Within this system, spouses can agree to hold a few or all of the marital property, commonly by forming a community property agreement or creating a trust. 

Community property management needs a clear understanding of what is and isn't included in its ambit. The list below is a clear bifurcation between the two.

Included

• Income earned by either of the partners during a marriage. It includes salaries, wages, commissions, and bonuses. 
• Assets that were acquired or obtained with the use of marital funds are included. Examples in this regard could be real estate, vehicles, personal property, and investments.
• Any form of retirement savings like pension benefits, retirement accounts, and any other retirement savings is also considered marital property.
• Not just assets and earnings but also debts incurred by either spouse while being married mandate that both of them have a share of that as well. 
• Interest earned through business or even profits of a business run by either of the spouses while being married is considered under the 'included' umbrella unless there is an agreement that states otherwise. 

Not Included

• Properties and other assets that either partner acquired before getting married are not included. They remain separate or individual property. However, if the partners of a marriage want to combine their assets, a written agreement can be drafted to clarify things on that front. 
• Any gifts received by either of them or a property received through inheritance is also considered separate property for the spouse who receives them unless an agreement states otherwise.
• A prenuptial or postnuptial agreement can help partners within a marriage to separate a particular asset from the marital property. These customized versions of the law are popular as they allow the couple to take calls as per their understanding.

Various governing bodies in different countries have systems that are closely tied to community property income and how it is split. However, there are differences. Below is a detailed discussion that sheds light on variations of the concept. 

• A common variation is that all marital property from a previous marriage is considered community property. These properties might be excluded from the partner of the current marriage to safeguard the interests of the heirs from the previous partner.
• In some situations, all acquisitions and profits are shared among the spouses. However, the debts and other liabilities are separately maintained by each spouse based on who incurred them. 
• Most community property laws are in line with the practice where both spouses have an equal share in all property purchased or acquired during the marriage. Nevertheless, gifts, inheritances, and properties when they were permanently living apart or acquired before the marriage are excluded from being a common asset for both partners. 

Now that basics and related factors are out of the way, using examples to understand the practicality and real-life application shall enhance understanding of the concept even further. 

Example #1

Susan and Johnny got married in Wisconsin. During their marriage, Susan ran a small boutique, and Johnny was a road contractor. They acquired multiple government contracts, earning substantial amounts. However, Susan could barely keep the boutique afloat.

After much deliberation, Susan suggested to Johnny that it was unfair to share all the acquisitions and earnings equally when there was such a vast gap in the degree of earnings. 

They entered an agreement where they mutually agreed to share the marital properties 65-35 in favor of Johnny. If they had yet to enter an agreement, the state rules mandated them to share all assets 50-50, irrespective of who earned them.

Example #2

The TV show The Real Housewives of Atlanta stars Kim Zolciak-Biermann and Kroy Biermann split in May 2023 after being married for 11 years. After the split, Kim went on a selling spree, selling anything from shoes to clothing and other assets.

Kroy filed paperwork in January 2024 to seek an equal division of marital assets that includes the home that they shared in Georgia and another personal property when their marriage was still in place. 

Kim reportedly earned $3 million for the five seasons of the reality show, and Kroy made little over $14 million during his time with the Atlanta Falcons, the football team. After the split, Biermann stated that the marital debt is massive as the IRS has a lien on the pair's house for $1.1 million. Therefore, he is filing for an equal share to meet his end of the bargain.

Community property laws direct that both spouses have an equal percentage of ownership of all assets and other earnings acquired during the marriage. However, upon the death of either of the spouses, the surviving spouse often gets the deceased spouse's share of marital property as well. 

Properties bound by marital laws can help with the seamless transfer of shares to the surviving partner outside of the probate. These actions usually save costs, effort, and time. 

When it comes to estate planning, marital property rules can bring some significant tax advantages. One of the most significant ones is the step-up for inherited properties. A step-up is not possible if the surviving spouse separately owns the property. 

These laws also provide asset protection by limiting the claims made by creditors to the deceased partner's share of the marital property. Therefore, the surviving spouse's assets are guarded from creditors. 

The benefits and advantages of community property management have been made clear through the article thus far. On the flip side, it is essential to understand the drawbacks of the system as well as the concept altogether. The points below cover the significant drawbacks of the system.

• Marital property laws direct that both spouses have equal rights over common assets. As a result, there needs to be more control for the spouse who earns or inherits the property or asset. 
• Upon divorce, the marital properties are split equally among spouses regardless of who earned the sum or their contributions as well. Therefore, there needs to be more in considering the individual circumstances and needs of the spouses at the time of the divorce.
• The tax treatments for such scenarios are complicated. It makes tax and estate planning a hassle, especially for couples with dissimilar tax situations and financial goals.
• The protection provided to properties in this regard is limited in comparison to separate properties, as creditors have access to the properties of both spouses. 
• The valuation, division, and classification of marital properties could lead to disputes between spouses. These battles can lead to legal battles that attract further stress, expenses, and allotment of time. 

While there are concepts that might seem the same as community property laws, they are, in fact, quite different, let us understand the distinctions between them through the comparison below. 

Community Property

• Property, investments, and other assets acquired during a marriage are considered common or marital properties.  
• Both spouses have equal ownership and management rights, irrespective of who earned them.
• Upon death or divorce, the assets under this category are divided equally among the partners unless there is an agreement or a court order that states the terms otherwise. 
• Upon the death of one spouse, the surviving spouse gets the deceased spouse's share of assets as well. 

Joint Tenancy

• A joint tenancy is a property owned by two or more individuals jointly. These individuals have an undivided interest in the property. 
• A joint tenancy requires unity of time, interest, title, and possession. These terms of unity must be clearly stated in a legal document, such as a deed. 
• In the event of the death of one of the partners, their share of the property is automatically shared among the surviving partners without having to go through the lengthy process of probate. 
• The interests of a joint tenancy can be transferred with the consent of all co-owners.

Equitable Distribution

• Assets acquired within the time a marriage lasts are referred to as marital property, which shall be subject to division in the event of divorce. 
• The division is based on principles of fairness instead of a strict equal division of assets. 
• Unlike community property states, states that follow equitable distribution take the help of a judge to divide the properties that belong commonly based on circumstances and needs individually. 
• Factors like contributions to the marriage, earning capacity, financial needs, and the marriage's duration are considered by courts before division.