Separate and Community Property
Today I want to briefly talk about something that is relevant to all married couples, or those going to be married, understood by very few, and confusing to all: community and separate property. The property is treated differently at two points in a person’s life: at divorce, and at death of one of the spouses.
First, a few notes:
- This area of law is very complicated, so this blog post is meant like a 10,000 foot overview and everything I say here is likely subject to a few exceptions (sorry, that’s just how law frequently works…)
- I’m not a divorce attorney – they are the ones that deal with this the most, and finally
- “Property” is anything, not just cash – real estate, businesses, investments, retirement plans, vehicles, etc.
- Belongs to just one of the spouses. We’ll abbreviate it as SP.
- SP is acquired in one of the few available ways:
- Before marriage
- As described in a prenuptial or postnuptial agreement (so basically the spouses can agree what will be SP)
- Absent an agreement, and during marriage, acquired through:
- Lottery winnings
- Bequest (inheritance)
- Personal injury settlement (you get rear-ended, you get hurt, insurance pays, that money is now your SP)
- At divorce, each spouse walks away with his or her separate property
- A HUGE POTENTIAL MESS when SP-owning spouse dies, without an estate plan:
- The default law (so law that applies if the spouse did not have an estate plan) splits SP between the surviving spouse and other surviving relatives (the proportion of the split depends on what relatives the deceased spouse had). So, the surviving spouse will have to co-own the deceased spouse’s SP with relatives
- Absent an estate plan and a revocable trust, certain property like real estate is subject to probate (visit here to learn about revocable trusts) . Since SP is going to be split with people other than the surviving spouse, the property would first have to go through probate (see here about costs of probate).
- If the deceased spouse had kids who are under 18, they’ll have to receive their inheritance through a guardianship of estate – another way to get dragged through the court paying thousands of dollars.
- Belongs equally to each one of the two spouses.
- Anything acquired during marriage, absent a prenuptial or postnuptial agreement, and not listed in any other SP categories, above. The most obvious type of CP is salary from a W2 job.
- At divorce, this property is split between the two spouses.
- This is the good news of this post. At death, all of the CP is automatically inherited by the surviving spouse, without probate, and without further complications.
This is where things get fun. “Transmutation” is the process through which property changes character – separate becomes community, community becomes separate (more rarely). To make matters even worse, one asset can simultaneously be both community and separate property. My favorite example is a house acquired by husband before marriage. Let’s say H bought the house before marriage, then got married without a prenuptial agreement, W moved in, became a stay at home wife, and supervised a roof replacement that was paid for out of husband’s salary. When they start to get divorced, he’ll claim that the house was acquired before marriage and thus is SP and she doesn’t get it. She’ll claim that a part of the house has actually been transmuted from SP into CP, through: payment of mortgage from his CP salary, new roof paid for from this salary, and her efforts of supervising the installation of this new roof. Oh, and some part of appreciation of value of this house. Then, their divorce lawyers will use fancy formulas to figure out what percent of this house is remaining as SP, and what has in fact become CP and thus is divisible between the two spouses.
What to do
- Discuss these things before marriage
- If 1 was not done, discuss these things during marriage, but well before death and/or divorce. Look at the nature of your property, agree on what it is, and write it down
- At least do your estate planning to avoid dealing with this when one of the spouses passes away. You’ll have plenty to deal with.
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- Richard H., as posted on www.Linkedin.com on 6/23/10