All about community property

How community property can affect an estate

• Nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

• During a marriage, any new assets or debts are shared 50-50 between spouses.

• When one spouse passes away, the other becomes responsible for their debt.

• Consult a lawyer if you aren’t sure if community property laws apply in your situation.

What happens to a married person’s assets when they pass away? What about their debt— whose responsibility does that become?

These are sensitive and often thorny questions. For some, knowing the answers makes it a little easier to navigate the logistics of dismantling an estate while grieving a terrible loss at the same time. Being aware of the laws that govern questions of property and marriage will help you figure out how to account for your assets and debts, down the road.

These laws vary depending on what state a person lives in, specifically whether it is one of the nine states with community property laws. Those nine states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Three others—Alaska, Tennessee, and South Dakota—allow spouses to opt in to a community property agreement or to designate specific items as community property.

What exactly is community property?

Community property rules are invoked in the event of a divorce, or when a spouse or domestic partner passes away.

Originating in Spanish civil law, community property refers to anything acquired or amassed over the course of a marriage or domestic partnership. Regardless of which spouse earns or spends money during the marriage, both are thought to own everything equally. That means capital from the sale of stock, for example, is shared by both of them. Or a newly purchased car, even if only one person in the marriage signed the deed for the vehicle. It also means a couple has equal responsibility for a mortgage and other forms of debt that are taken on over the span of their marriage.

What is the purpose of community property?

The rationale for community property hinges on the idea that both partners contribute to their union equally, regardless of whether that contribution derives from a salaried job or from hours put in folding laundry and bathing children.

Community property aims to look out for the interests and welfare of both spouses equally, and regards all forms of contribution to the marriage as equal.

If you live in a community property state but you and your spouse do not want to be governed by these laws, you can take proactive steps to override them by drawing up and signing a prenuptial agreement.

What is excluded from community property?

Any assets that a spouse acquired before the marriage are considered separate property. For instance, some people already own a home when they walk down the aisle. In that case, it will be exempt from community property rules unless the homeowner takes steps to add their spouse as co-owner.

In addition, If you buy something during your marriage exclusively with money you earned before it, that purchase may be exempt from community property. If you buy it with money earned both before and during your union, it is less clear what category the asset falls into. It is always a good idea to consult a lawyer specializing in estate planning to be sure what is and what is not community property, especially since the particulars of the law vary among the nine community property states.

Separate assets that become integrated with shared ones, such as in a joint bank account, may become part of community property.

Gifts and inheritances are generally exceptions to community property. If you alone are the designated recipient of either, that gift is yours alone unless you determine otherwise.

What happens to community property when one spouse passes away?

Some people take comfort in living in a community property state if they find writing a will daunting. Thinking about the end of one’s life or about dispersing possessions and assets can be stressful and emotionally painful, and community property can make this less of a necessity.

In community property states, the surviving spouse generally inherits all shared assets their loved one has left behind if they didn’t write a will. Even if their intention was to bequeath something to a child or a sibling, without a will, the surviving spouse is under no legal obligation to share anything.

Is there a way to leave community property to other people?

The short answer: Yes.

Community property does not mean your share of the assets must de facto be left to your spouse when you pass away. Remember, you own an equal share of all assets considered community property and are free to leave your half to whomever you want—as long as you outline this in a valid will or a trust.

Joint tenancy with right of survivorship, on the other hand, is not like community property. If you and your spouse have an agreement of joint tenancy on a house, for example, that agreement will trump anything you might otherwise stipulate in your will, and full ownership will go to your spouse should you pass away.

There are always exceptions and caveats, however; it's always a good idea to consult an attorney who specializes in estate planning to make sure you have not overlooked anything.

What becomes of debts in community property states?

Like assets in community property states, debts are jointly shared by both partners in a marriage if those debts were incurred during the course of the relationship, regardless of who took on the debt. That’s because they were incurred on behalf of the community—the couple. These debts will generally have to be repaid from the couple’s shared income or assets, even if the partner who took on the debt has passed away.

Debts that precede the marriage, such as student loans taken out before they married, remain separate and will generally not become the responsibility of the other partner.

There may be exceptions to these rules in certain community property states, depending on the type of debt. Spouses can also sign prenuptial agreements that effectively nullify their shared debt if they so choose.

Estate law is complicated in the best of circumstances. To make sure you are clear about the rules and exceptions related to property and debt, consult a lawyer when the time comes.

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