Community Property Explained

Community Property Defined
Community property laws control the division of assets in nine states including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The law of governs the remaining forty-one states.

Under community property law (also commonly referred to as the fifty-fifty (50-50) rule) all real and personal property acquired during marriage by a married person is presumptively community property. It may include a couple’s wages, earnings, income, savings, real estate, brokerage accounts, boats, cars, art, credit obtained during marriage, bonuses and any other property, real or personal. Community property is divided equally upon divorce, dissolution or legal separation, except under special circumstances.

The equal division of community property may result in the actual, equal division of each and every divisible asset, or the equal distribution of different assets of equal value to the husband and wife. In the event either method of property division results in one spouse receiving assets that are worth than those received by the other, the spouse who received the assets of greater value will usually pay the other a sum of money that is equal to one-half of the difference in value of the assets received.

Examples of community property division:
(1) Husband and wife are each awarded one-half of the couple’s bank accounts, retirement accounts and net house sales proceeds, or

(2) Husband is awarded bank account number 001, his car and his 401k account and wife is awarded bank account number 002, her car and her IRA, or

(3) Husband is awarded the couple’s condominium, his car and his 401k account and wife is awarded the couple’s beach house, her car and her IRA. The parties’ car, husband’s 401k account and wife’s IRA are all of equal value, however the beach house is worth $20,000 more than the couple’s condominium. Because the beach house is worth $20,000 more than the condominium, wife will pay husband $10,000, or one-half of the $20,000 difference in the value of the properties, to equalize the division of property and ensure that husband and wife each receive exactly one-half of the community property estate.

The Significance of the Separation Date
Community property begins to accrue on the date of marriage and ends when the marriage is officially over. The date upon which a marriage is officially over is determined by state laws and may occur on any of the following dates:

• The date of “legal” separation
• The date of “physical” separation
• The day the Petition or Complaint is filed and/or assigned a case, docket or index number
• The date the judge or commissioner grants your divorce, dissolution or legal separation
• The day your divorce agreement or judgment is filed
• The day you and your husband choose or a judge or commissioner assigns

It is common for husbands and wives to fight over separation dates. Their disagreements are usually financially motivated and can significantly affect the size of a divisible community estate. For example, if a husband is the primary breadwinner and his wife a stay-at-home mom, he may want to establish an earlier date of separation because his wages, income and bonuses earned after the date of separation will be characterized as his separate, not community, property. His wife may, however, want to establish a later date of separation to maximize the divisible community estate. There are a number of criteria used to determine the actual date of separation and if a party wishes, he or she may ask the court to schedule a date of separation trial or hearing, where each spouse puts forth evidence to convince the judge or commissioner that his or her proposed date of separation is correct.

Overcoming the Community Property Presumption
The presumption that property acquired during marriage by a married person is community property and subject to equal division by spouses may be overcome upon a showing that the asset, even though purchased or received during marriage, is nonetheless separate property. In some states like California, a spouse may overcome the presumption by proving the asset in question was a gift, bequest or inheritance made by a third person for the exclusive benefit of one spouse (not both); the rents, profits, income, sales proceeds, dividends or interest received during marriage were generated by an asset acquired before marriage; or the asset was purchased using the rents, profits, income, sales dividends or interest received during marriage but generated by a separate property asset acquired before marriage.

To overcome the community property presumption a spouse must also prove that his or her separate property was not commingled or transmuted into community property. If a spouse believes that an asset is separate property, he or she has the burden of proof. In some cases, the burden may be met effortlessly and in others, may require great effort and cost.

Examples of Methods of Overcoming the Community Property Presumption:
(1) Before marriage your husband opened a bank account with a $10,000 deposit that remained open but untouched during your ten-year marriage. In the divorce, dissolution or legal separation process your husband can prove that the account is his separate property by producing bank account statements for the period beginning before marriage and ending on the official termination of marriage. If the bank account statements clearly show that the funds on deposit in your husband’s account was never commingled with or transmuted into community funds, (described below) your husband’s bank account should be declared his separate property and therefore, not subject to division in the divorce, except under special circumstances.

(2) Before marriage your husband opened a bank account with a $10,000 deposit. During marriage your husband closed his account and used the funds as the down payment for your first home, title to which was held as “husband and wife, as tenancy in common”. Also during marriage, you and your husband used your wages to pay down the mortgage on your first home, which was then sold. The house sales proceeds, plus the inheritance you received exclusively from your father, were combined and used to purchase your second home, title to which was also held as “husband and wife, as tenancy in common.” In divorce, dissolution or legal separation your husband can prove that his initial $10,000 is still his separate property and may not be equally divided in the divorce. Your husband can prove this by tracing the $10,000 from his original bank into the second house and showing that the funds remained in tact without being commingled or transmuted (described below). (This process is called a “tracing” and, because it can be a very complicated process, it usually requires a forensic accountant to do an in-depth and extensive analysis of the movement of funds through various bank accounts and assets during the marriage. Because it can also be a very expensive process, the hypothetical tracing of your husband’s $10,000 may not be worthwhile because the costs could outweigh the benefits.)

Commingling Community Property
Husbands and wives commonly commingle their community and separate property assets during marriage. They do this by depositing both community and separate property funds into a single joint account and/or by making purchases, transferring money, reinvesting and even borrowing funds from third party sources. The mere mixing of separate and community assets does not change the respective characteristics of the assets, provided a spouse can trace the separate property portion of a mixed asset to its separate property source. If however a spouse is unable to trace and identify his or her separate property contributions, the entire asset that was acquired or once included separate property will be considered equally divisible community property.

Transmuting Community Property
A transmutation in divorce, dissolution and legal separation is an interspousal transfer (between spouses) or an agreement that changes the character of property the husband and wife already own. There are three general transmutations that may occur in marriage: (1) the transmutation of community property into the separate property of one spouse; (2) the transmutation of one spouse’s separate property into community property; and (3) the transmutation of one spouse’s separate property into the separate property of the other spouse. In some states like California, the transmutation of very valuable assets are invalid unless they are set forth in a written agreement that includes an express declaration by the spouse whose interest is being effected that he or she intentionally made, consented to, or accepted the change in characterization of the asset. (Transmutations in California that occurred prior to January 1, 1985 are governed by the law that was otherwise applicable.) When state law requires transmutation agreements, strict compliance is usually required before a judge or commissioner will confirm and validate the transmutation.

The law of transmutation generally does not apply to commingled assets or assets of minimal value, such as gifts of jewelry, clothing or other gifts that are intended for and used solely by one spouse (e.g. your husband’s fishing rod or your women’s snow shoes). Transmutations are also usually subject to fraudulent transfer laws, which means that courts will scrutinize the facts and circumstances leading to the transmutation to ensure it was not the result of fraudulent activity.

Community Property Waivers
Generally, a spouse may waive his or her right to community property in a pre or post-nuptial agreement provided the agreement satisfies all applicable laws. A pre or post-nuptial waiver of community property may also be reversed during marriage or at the time of divorce, if spouses mutually agree. If a community property waiver is valid, a judge or commissioner will usually enforce it in divorce, dissolution or legal separation.

This article is not legal or financial advice. You should contact a lawyer, accountant and/or financial professional in your state to discuss the specifics or your case and applicable laws.