How Community Property affects your assets, when it applies

The legal term community property refers to assets that were acquired during a marriage. Community property law gives equal ownership to all assets, regardless of who acquired them. This law applies to financial assets, including retirement accounts, real estate, personal property (such a vehicle), income, and even debt.

Some cases may be exempt from the application of community property laws, depending on state laws. These are the most common exclusions:

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  Property acquired prior to a marriage.
  

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  Property listed in a prenuptial arrangement.
  

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  A property acquired in a state that does not have community property laws. There are exceptions to the rule depending on where you live. More details later.
  

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  Inheritance or gifts received by one spouse.
  

Currently, there are nine states in the United States that have community-property laws:

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  California.
  

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  Louisiana.
  

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  New Mexico.
  

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  Washington.
  

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  Wisconsin.
  

Every state has its own rules and regulations regarding community property and how to approach living arrangements. Some states may recognize domestic partnership agreements under the community property law. This means that you don’t have to be married to make the law apply.

There are also states with optional community property trust laws that allow married couples to convert their assets into community property. Spouses in Alaska, Florida Florida Kentucky South Dakota Tennessee can choose to share some or all of the assets that are subject to community property laws. Most states require that married couples establish a community trust in order to hold assets.

Joint-owned agreements that give equal ownership to spouses are called community property trusts. A community property trust has the advantage that, in the event of the death of one spouse, the surviving spouse will receive a stepped up cost basis equal to the current market value of all assets. The surviving spouse can replace the original purchase price of the asset with the current market value, which can reduce capital gains tax.

The community property arrangement will be terminated if you move from a state of community property to one of common law.

Any property that you take with you to California, Idaho or Washington will automatically fall under the state’s community property laws if you move from a common-law state to one of these states. You and your spouse can decide to change the property ownership if you move to Arizona, Louisiana Nevada, New Mexico, Texas or Nevada.

You can’t leave more than 50% of the assets that you have acquired in a community property estate to your spouse if you are married. Moreover, either spouse cannot sell or give away any community property without consent from the other spouse.

All retirement accounts that are funded after a marriage must list the surviving spouse the sole beneficiary, unless an agreement is made and signed by both spouses.

To legally end the community property estate, most states require that a divorce decree be filed. This is true even if the spouses are no longer living together. Only Washington and California recognize physical separation with an intention to divorcing as grounds to terminate a community property estate.