During divorce, property owned by one spouse before marriage is treated as separate property. Gifts received during the marriage are also treated as separate property. However, this system of property division differs from jurisdiction to jurisdiction. In some jurisdictions, gifts are treated as community property, while in other jurisdictions, they are treated as separate property.
Common law states
Using community property laws to plan your estate can be a convenient way to protect assets from your spouse’s creditors and relatives. This will help avoid probate and legal battles with your family members. However, the benefits may not outweigh the costs.
Community property states create a rebuttable presumption of community ownership of all marital property. This can save you income taxes on your estate when your first spouse dies.
However, a lot of couples do not take advantage of this asset protection method. This is because they do not have a formal premarital agreement, and they are not aware that community property is a real asset protection technique.
The prenuptial agreement will explain how your marital assets will be allocated in the event of divorce or bankruptcy. It will also specify how the assets will be divided when one of you passes away.
In many common law states, a dower and curtesy (the right of the surviving spouse to receive the estate of the deceased) is not required. However, this can be important in some cases.
As a result, a husband can’t use his wife’s property to pay off his debts. This is because a house is not considered separate property until it is purchased.
Elective community property states
Elective community property states allow couples to create a community trust for their joint property. This will help ensure that the assets are shared by both spouses. These states also allow surviving spouses to waive their rights to marital property in a prenuptial or postnuptial agreement.
Typically, the surviving spouse will receive half of the property. However, there are some common law states that do provide for an elective or forced share in the deceased spouse’s estate. It is important to know how to get this type of inheritance. Usually, it is only awarded to the surviving spouse, but it may be available to other family members.
In addition to the inheritance rights, community property states also have a different approach to how they treat the interests of the surviving spouse. Unlike separate property states, they do not share debts that were acquired before the marriage. In fact, most community property inheritance laws do not apply to assets that are legally kept separate. In some cases, this will be a problem.
A community property state will treat all money and property that was acquired during the marriage as if it was jointly owned. In divorce, this means that if you have a joint home, the proceeds from selling it will go to both you and your spouse.
Issues with a community property system
Using community property laws in your estate plan can be a convenient way to handle your financial assets without the hassle of contesting from relatives or the court system. It can also offer substantial tax benefits to married couples.
Although these laws vary from state to state, they generally allow you to hold all or part of your assets as community property. Some states even allow you to opt-out of the system in the future.
Other states only question your equitable distribution of community property when it is deemed necessary. In addition, you may be surprised to learn that your income is considered to be a part of your spouse’s income, rather than your own.
In addition to the obvious, some states also characterize certain types of separate property as “quasi-community” property, which means that you won’t have to pay any taxes on it. It is important to understand what these distinctions are and how they apply to your own situation.
One example is how community property states treat the market value of publicly traded stocks as separate from their cost. This is because publicly traded stock prices tend to appreciate over time, and it is not uncommon for these companies to be sold to a new buyer during the course of a divorce.