How Does Community Property Differ From Separate Property?
Community property includes earnings, purchases, and debts accumulated during the marriage. Separate property includes assets owned before marriage, individual inheritances, gifts received by one spouse, and personal injury settlements. The distinction matters in divorce (community property is split 50/50) and at death (each spouse can only bequeath their half of community property). Commingling separate and community funds can convert separate property to community property, making careful record-keeping essential.
How Does Community Property Affect Estate Planning?
In community property states, each spouse owns exactly half of all community assets. At death, the deceased spouse can only direct their half through a will or trust. The surviving spouse automatically retains their half. A major tax advantage: both halves of community property receive a full step-up in basis at the first spouse's death — unlike common-law states where only the deceased spouse's half gets stepped up.
What Is Community Property vs. Common Law Property?
The remaining 41 US states use common law (equitable distribution) systems, where assets are owned by whoever earned them or whose name is on the title. In divorce, common law states divide property "equitably" (fairly, but not necessarily equally). In estate planning, common law states only provide a step-up in basis on the deceased spouse's share. Some common law states allow couples to opt into community property treatment through agreements.
Frequently asked questions
What happens to community property in a divorce?
In community property states, community assets are generally split 50/50 in divorce. Separate property remains with the original owner. However, the exact division can vary — some states allow judges to consider factors like length of marriage and each spouse's economic circumstances.
Can a prenuptial agreement override community property laws?
Yes. A valid prenuptial (or postnuptial) agreement can override default community property rules. Couples can agree to treat certain assets as separate property, change how community property is divided, or even opt out of community property entirely.