Business, Legal & Accounting Glossary
A method for defining the ownership of property acquired during marriage, in which all earnings during marriage and all property acquired with those earnings are considered community property and all debts incurred during marriage are community property debts. Community property laws exist in Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin. Compare equitable distribution and separate property.
n. property and profits received by a husband and wife during the marriage, with the exception of inheritances, specific gifts to one of the spouses, and property and profits clearly traceable to property owned before marriage, all of which is separate property.
Community property is a concept which began in Spain to protect rich women from losing everything to profligate husbands, and is only officially recognized in some states which were once under or influenced by Spanish or Mexican control, including California, Arizona, New Mexico, Texas, Nevada, Idaho, Washington and Louisiana. Community property recognizes the equal contribution of both parties to the marriage even though one or the other may earn more income through employment. By agreement or action the married couple can turn (transmute) separate property into community property, including by commingling community and separate funds in one account. Community property is recognized based on fact or agreement of the parties, rather than holding of title. The state courts have wavered on what constitutes proof of community property, including the issue of whether joint tenancy is evidence of community property or not. Upon divorce community property is divided equally without regard to fault. Upon the death of one spouse all the community property goes to the other except in Texas surviving children get one half and in obvious sexual discrimination Nevada and New Mexico allow the husband to will a half to someone other than his wife.
Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions. The portions of the United States that recognize community property, which are primarily the western States, acquired this body of law from the law of Mexico.
In a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property. The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit.
Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California, a 50/50 division of community property is mandated by law; in others, such as Texas, a divorce court may decree an “equitable distribution” of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property). See division of property. Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided “equally” while community debt is required to be divided “equitably”.
Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is “transmuted” into community property. The rules for this vary from jurisdiction to jurisdiction.
In the United States, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico allows property to be owned as community property also. Alaska is an opt-in community property state; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust.
If property is held as community property, each spouse technically owns an undivided one-half interest in the property. This type of ownership applies to most property acquired by the husband or the wife during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage. After a divorce, community property is divided equally in some states and according to the discretion of the court in the other states.
It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states, income from separate property is also separate. In others, the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state.
Community property has certain federal tax implications, which the Internal Revenue Service discusses in its Publication 555. In general, community property may result in lower federal capital gain taxes after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called “community property with right of survivorship.” This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or an another form of concurrent ownership) vary from state to state.
Consumers who are considering how to hold property should either research reliable legal source materials, or consult with a lawyer or Certified Public Accountant.
Often a new couple acquires a family residence. If the marriage terminates in subsequent years, there can be difficult community property problems to solve. For instance, often there is a contribution of separate property; or legal title may be held in the name of one party and not the other. There may also have been an inheritance or substantial gift from the family of one of the spouses during the marriage, whose proceeds were used to buy a property or paydown a mortgage. Case law and applicable formulas vary among community property jurisdictions to apply to these and many other situations, to determine and divide community and separate property interest in such a residence and other property.
Community property issues often arise in divorce proceedings and disputes after the death of one spouse. These disputes can often be avoided by proper estate planning during the spouses’ joint lifetime. This may or may not involve probate proceedings. Property acquired before marriage is separate and belongs to the spouse who acquired it. Property acquired during marriage is presumed to belong to the community estate except if acquired by inheritance or gift, or by exchange for other separate property. This definition leads to numerous issues that can be difficult to ascertain. For instance, where a spouse owns a business when marrying, it is clearly separate at that time. But if the business grows during the marriage, then what of the additional property acquired during marriage? Do they not result from labor of the spouses? Were some of the funds that were used to pay for the property community funds while a portion of the funds were separate property?
Community property may consist of property of all types, including real property (“immovable property” in civil law jurisdictions) and personal property (“movable property” in civil law jurisdictions) such as accounts in financial institutes, stocks, bonds, and cash.
A pension or annuity may have first been acquired before a marriage. But if contributions are made with community property during marriage, then proceeds are partly separate property and partly community property. Upon divorce or death of a party to the marriage, there are rules for apportionment.
Stock options are also difficult to ascertain. A stock option is a right to purchase shares of a company at a fixed price. Companies with growth potential sometimes award stock options as compensation to employees, during times when there is not enough money to pay a suitable salary. By accepting a stock option for compensation, an employee invests his or her own trust in the belief that he or she will help make the company acquire a higher value. Thereafter, the employee works and contributes value to the company. If the company later acquires a higher share valuation, then the employee may “cash in” his options by selling them at the fair market value. The employee’s trust in this future value motivates his work without immediate compensation. That effort has value. If the marriage is terminated before the shares are cashed in, then the parties must decide how to apportion the community property portion of the options. This can be difficult. Case law precedents are not yet available for all situations involving stock options.
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This glossary post was last updated: 27th April, 2020 | 2 Views.