When does separate property become community property? Perhaps you are getting ready to get married, are thinking about divorce, or are in the process of getting divorced. This question comes up often during any of these processes, and rightfully so. The question of how to determine whether property is separate or community can be quite tricky and legally challenging. If you have this question in your mind, you’ve come to the right place. In this guide, we’ll give you the answer to this exact question, as well as additional questions that will further benefit you.
When Does Separate Property Become Community Property?
The issue of when separate property becomes community property seems most prominent during the process of a divorce. A couple might disagree as to what property is separate, and what property is owned communally. This determination is important, because it dictates what property is subject to division based on property laws.
To understand the distinction between separate property and community property, and when separate property morphs into community property, it’s helpful to understand the following concepts:
Separate Property
Community Property
Commingling
Asset Tracing
Transmutation
Separate Property
State law defines whether property is separate or not. In most states, separate property is any property that was acquired before or after a legal period of marriage. In addition, if an individual receives a gift or an inheritance, it is typically considered separate property, regardless of whether or not they were married. Personal injury proceeds are also sometimes considered separate.
Those concerned about ensuring that certain property remains separate during marriage will often make use of a prenuptial agreement. This is a legal document signed by both parties, who agree that the listed property is and will be separate regardless of marital status.
The exact dates of marriage and separation become important if there are any disputes regarding separate property.
Community Property
There are a few states that use community property law, which dictate that any property acquired during a marriage, as well as any debts, are shared equally by either spouse. The community property states are:
Arizona
California
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
Alaska*
*The state of Alaska is an “opt-in” state.
Commingling
Commingling is one of the most common causes of separate property turning into community property. This is a phenomenon in which separate property gets intermixed with community property, so much so that it becomes nearly impossible to trace it.
For example, if one spouse receives a cash gift but deposits it into a joint bank account, that money becomes nearly impossible to trace. This is especially true if the funds have since been spent throughout the marriage.
Asset Tracing
Once separate property becomes community property, it can be very difficult to make a distinction. Tracing separate property assets requires evidence, such as clear paper trails that show how the property was acquired, how it was used, and how any proceeds were used if the property was sold. Liquid assets are even more difficult to prove.
An individual going through a divorce may use asset tracing as a means to prove and establish separate property ownership. Keeping organized documents and paper trails is recommended.
Transmutation
Transmutation is the legal term for when the classification of property changes from separate to community. The intent behind the change becomes important, and evidence that both parties agree must be shown. We provide further explanation on how to transmute property next.
How Do You Transmute Separate Property to Community Property?
The laws on transmutation can vary from state to state. However, in general, there are some legal requirements surrounding the valid transmutation of property.
For example, let’s say an individual purchases a home. A few years later, they get married, and they want to show intent that their spouse has equal ownership of the house. In order for the transmutation to occur, they then must retitle the home so that it shows both spouses’ names.
Later on, in the divorce, the original owner cannot argue that the house is separate property because they intentionally transmuted the property so that it is community property. Such decisions should be made very carefully.
Courts generally follow three steps to determine whether a transmutation process is valid in the eyes of the law. The specificity of these steps may vary from state to state. Below, we provide an outline of the steps used by California courts to help illustrate:
1. In Step 1, a court will determine whether a transmutation follows the formal requirements. In California, these are listed in California Family Code 852. This code dictates that the transmutation must have been made in the shape of a written, express declaration in which the spouse accepted that their interest in their property would be impacted adversely.
2. In Step 2, the court will then question whether or not there was any wrongdoing surrounding the transmutation. Possible scenarios include fraud or forceful influence. The individual who is petitioning the transmutation’s validity is required to provide enough evidence to quell any suspicion that the transmutation was processed through any untoward influence over the other party.
3. Finally, in Step 3, the court will rule on whether or not a spouse’s right to get reimbursed is waived due to the transmutation. California Family Code 2640 states: “A party shall be reimbursed for the party’s separate property contributions to the acquisition of property of the other spouse’s separate property estate during the marriage, unless there has been a transmutation in writing, or a written waiver of the right to reimbursement.” The code indicates that an individual should not transmute property if there is any chance that they’d eventually like to be reimbursed for the property in the case of a divorce or legal separation.
How is Community Property Determined?
Community property laws are currently applied in 9 states:
Arizona
California
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
Alaska*
Alaska is not a community property state; however, couples can elect to opt-in to community property rulings if they so desire.
In these states, each individual in a marriage (and often domestic partnerships, laws vary from state to state) owns a share of any property and assets that were acquired during the marriage.
In California, for example, community property is divided exactly in half. Each spouse receives 50 percent of all assets acquired during the marriage, regardless of income and who financed the purchase. In Texas, a judge may divide the assets in any proportion that appears equitable to either spouse.
How Does Community Property Work?
In these states, each individual in a marriage (and often domestic partnerships, laws vary from state to state) owns a share of any property and assets that were acquired during the marriage.
So how does community property work in these states, exactly? The answer is not simple, as each state may apply community property rules in different iterations.
In California, for example, community property is divided exactly in half. Each spouse receives 50 percent of all assets acquired during the marriage, regardless of income and who financed the purchase. In Texas, a judge may divide the assets in any proportion that appears equitable to either spouse.
Maximize Your Estate Planning for Community Property and Separate Property
In the context of estate planning, whether or not you live in a community property state or not will inform how to structure your property.
If you live in one of the 9 states that apply community property law, understand that any assets acquired during marriage are considered community property. (There are a few exceptions, such as property that was acquired as a gift or through an inheritance.) If you were to go through a divorce, this property is divided up between you and your spouse based on how your particular state applies the law.
It’s also important to know that separate property, regardless of whether or not you live in a separate property state, can become community property.
“When does separate property become community property,” you ask?
In review, separate property becomes community property through two common scenarios: commingling and transmutation.
If you are concerned about keeping property legally separate, be sure to avoid unintentional commingling, and certainly avoid transmutation. In the case of commingling, you still have the opportunity to prove ownership through asset tracing. However, transmuted property typically is ruled as communal property.
If you are getting married, or are planning a divorce, be sure to take the steps to update your estate plan accordingly. These are both major life events that drastically impact your assets, and how you might plan to distribute it.
Now that you have this information, do you feel ready to update or establish your estate plan? Single, married, or divorced, Trust & Will has the solution for you. Get started today to make sure you have a Trust and/or Will that corresponds with your rightful property.
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