Planning your estate involves a lot of moving pieces. When educating yourself about estate planning strategies, you’re likely to read a lot of material that presents information within the context of having sole agency over your property.
If you’re married, are in a domestic partnership, or are going through a divorce, then you have a whole other aspect to factor in: estate planning for community property vs separate property.
Whether or not you have a partner, and whether or not you share any property or beneficiaries will heavily dictate how you structure your estate plan. It’s also important to know if you live in a community property state or a separate property state. In this guide, we’ll walk you through what counts as community property, and what counts as separate property. You’ll also find out whether or not you live in a community property state. First, let’s define the two terms that we are comparing in this guide.
What is Community Property?
Community property is any and all property that is owned jointly by a husband and wife. This means that they equally own and control that property, unless they agree otherwise.
It’s very important to know whether or not you live in a community property state. These states enforce that property acquired by a husband and wife during the time of their marriage is owned jointly, in the legal context. This means that in the case of a separation or divorce, both the husband and the wife are legally entitled to exactly half of the communal property, regardless of who acquired it.
It should be noted that some property acquired separately by either the husband or the wife is not considered community property, even in community property states. This could be in the form of a gift or inheritance.
Not sure whether or not you live in a community property state? You can find out more, in our community property states guide.
Estate Planning for Community Property
When it comes to estate planning, you want to first and foremost find out whether or not you live in a community property state. If you do not live in a community property state, then any property you own is considered separate from your spouse. We’ll talk more about this in the next section.
However, if you do live in a community property state, then you must consider how to conduct your estate planning jointly. For instance, married couples can establish one or more of the following estate planning documents to address their community property:
The purpose of joint Wills and Trusts is to make it easier to coordinate the distribution of communal assets and property to communal beneficiaries. Although it is possible for each spouse to own individual Trusts, coordinating the separation of titles plus the management of different trusts can make life more complicated. A joint estate plan to manage community property can also address asset protection, help a couple take advantage of tax benefits, and address what should happen if one of the spouses passes away before the other.
What is Separate Property?
Separate property is property that belongs only to the individual, even if they are married. The definition of separate property varies slightly from state to state, but the foundational concepts are the same.
Here are some examples of what is typically considered separate property:
Property acquired and owned by one spouse before the start of the marriage
Any gifts or inheritances received by one spouse, regardless of whether the time of receipt occurred before, during, or after the marriage
Property or debts that were legally defined as separate, such as through a prenuptial agreement
Any property acquired by one spouse using separate property assets with the clear intention of managing the property as separate
There are additional examples of separate property that only apply when not in a community property state:
Property acquired by one spouse during the marriage that wasn’t used by the other spouse, or didn’t benefit the marriage in any way
Personal injury awards, not including compensation for lost wages
The issue of whether or not property is separate or communal tends to become more pronounced during a divorce. For example, it’s possible for separate property to become so intermixed with communal property that it becomes impossible to identify it. Although no couple wants to head into a marriage expecting divorce, it’s a smart idea to consider signing a prenuptial agreement, plus to identify and manage separate property ealy on. That way, confusion and conflict can be minimized in the case a divorce were to happen.
What Does Separate Property State Mean?
Separate property states are states that are not communal property states. (You can find a list of communal property states here.)
These states implement common law property to identify how the ownership of assets should be divided in the case of a legal separation or divorce. In general, if one member in a domestic partnership or marriage acquires property, then that property belongs to them. The only exception is when both partners jointly acquired property, and they are both listed as owners of that property.
For example, let’s say that David and Maria are a married couple.. Maria purchases a car under her own name during their marriage. They decide to get divorced two years later. If David and Maria live in a separate property state, then the car automatically belongs to Maria. However, if they live in a communal property state, then the car would belong to both of them equally.
Which States Are Separate Property States?
Any state that is not a communal property state is a separate property state. In these states, any property belonging to a married couple would be categorized as separate property, even if they were acquired during the marriage.
Here is the full list of separate property states below:
Alabama
Alaska*
Arkansas
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Illinois
Indiana
Iowa
Kansas
Kentucky
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Hampshire
New Jersey
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Utah
Vermont
Virginia
West Virginia
Wyoming
Note that although Alaska is not a community property state, and is thus a separate property state, couples can “opt-in” to divide their property using community property law if they so choose.
What is the Difference Between Community Property and Separate Property?
Now that we’ve spent time defining community property and separate property, let’s pull it all together. The following will discuss the key differences between community property vs. separate property.
First, community property refers to any property that was acquired during a marriage while living in a community property state. In contrast, separate property refers to property owned before or after marriage, or property that was never shared by the spouses.
Examples of community property include salaries, wages, housing and investments. Gifts, inheritances, and property acquired separately and never used to benefit the other spouse are all examples of separate property.
There’s also a difference in tax reporting when it comes to community property vs. separate property. Each spouse is required to report 50 percent of their total community income on their tax return if they are filing separately. In a separate property state, each spouse would report 100 percent of their individual income when filing their taxes separately.
When Does Separate Property Become Community Property?
Separate property can become community property in a legal scenario called “commingling.” This is when what was once separate property or funds gets so intermingled with community property that it becomes impossible to trace or separate it. In this case, the separate property becomes community property.
If you were wondering if separate property can become community property, you had great insight. Knowing about this in advance can help either spouse make sure to keep their separate property just that — separate — so that it does not get commingled over the years.
Estate Planning for Community Property vs Separate Property
As you may have gathered, owning community property can impact your estate plan in a significant way.
The key difference between community property vs. separate property is ownership and legal entitlement. Married couples living in community property states should know that any property acquired during the marriage counts as community property. One exception is a gift or inheritance received by either spouse, which counts as separate property even if you live in a community property state. Further, any property that would have counted as separate property can easily get commingled and turn into community property.
Knowing this information is vital. It means that if a married couple were to divorce, or a domestic partner were to legally separate, then all property acquired during that partnership would belong equally to either person, regardless of who bought it. You may not necessarily have the legal agency to bequeath certain property without the consent of your partner.
Therefore, it’s highly advised that you have a discussion with your partner before crafting an estate plan. Based on your personal preferences, you may choose to sign a prenuptial agreement (if not married yet) and keep your assets legally separated. Alternatively, you may choose to commingle all your property and assets and create a joint estate plan. Of course, your estate plan will need to be adjusted accordingly in the case of separation or divorce.
We know that this can sound quite complicated, so, don’t worry! You do not have to go through this process alone. Trust & Will has several estate planning solutions to choose from to suit your needs and preferences. This is true for those wanting to establish joint estate plans using products like a joint Trust or Will, or those wanting to create separate estate plans. Find out how you can get started today.
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