If you live in Alaska, Arizona, California, Idaho, Nevada, New Mexico, Texas, Louisiana, Wisconsin, Washington or Puerto Rico, you live in a community property state, where community property laws are in effect. These laws govern your personal property and debts. It’s important you understand them even if you have no plans to divorce. That’s because the other triggering event is death. And even if you don’t plan to die, it happens to the best of us — planned or otherwise.
One of my clients ignored these rules and got completely taken to the cleaners when her husband died. It was their second marriage, and the kids by the first marriage mounted an attack on my client which amounted to financial abuse. Unfortunately, because she hadn’t protected herself, the courts sided with the kids, and my client was left out in the cold.
What are community property assets?
Anything a married couple owns together is a community property asset. That includes your assets or debts acquired while you were married. It also includes income and assets that either party earned during the marriage. Regardless of who earned the money, if you acquired it during the marriage, you each own it 50-50. That goes for the debts, too.
Can you keep anything separate?
Yes. Your property is separate and not subject to community property laws if:
- You owned it before you were married.
- You acquired it after you were legally separated.
- It was a gift or inheritance from someone other than your spouse. But be careful. For this property to be separate, you can’t commingle it with community property.
And if you or your spouse has debts that were acquired before you got married, those debts are separate too. If you have insurance, your life insurance beneficiary gets insurance proceeds and not your spouse. It doesn’t matter where you live.
What happens in divorce?
Community property assets are split 50/50 in most cases. That includes businesses, pensions and retirement plans. If you have retirement accounts, your attorney will get a QDRO from the court. This document will split the retirement account without subjecting it to IRS penalties.
What happens in death?
If your spouse dies, community property reverts to you. Basically what this means is that assets are assumed to be held in joint ownership unless there is some other evidence.
Community property laws vary quite a bit from state to state. In divorce, some states divide assets equally but debts equitably. That means the assets get split 50-50, but the debts might be split up differently depending on who incurred them and who has the greater ability to pay. That might come back to bite you if you were the responsible one and your soon-to-be-ex-spouse (the slouch) was the one who ran up the credit card debts. Since he’s a bum and can’t pay the debt, you might get stuck if you are more able to pay. Bummer.
Separate assets aren’t always clear-cut either. Let’s say before you got married you owned a small business worth $200,000. Over the course of the marriage, it did well and now it’s worth $500,000. What percentage of the business is a community asset?
This is where lawyers and courts get involved. It gets very sticky.
For this reason, if you are getting married and you already have assets, you are best served by speaking with a qualified attorney in your state to determine the best way to protect yourself should the marriage fail.