Jurisdictions
In the United States there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. While not a community property state, Alaska does allow couples to opt-in to a community property arrangement; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust. The territory of Puerto Rico allows property to be owned as community property also as do several Indian jurisdictions. In the case of Puerto Rico, the island had been under community property law since its inception to the Spanish Crown upon its discovery in 1492.
If property is held as community property, each spouse technically owns an undivided one-half interest in the property. This type of ownership applies to most property acquired by the husband or the wife during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage. After a divorce, community property is divided equally in some states and according to the discretion of the court in the other states.
It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states (so-called "American Rule" states), income from separate property is also separate. In others (so-called "Civil Law" states), the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state.
Community property has certain federal tax implications, which the Internal Revenue Service discusses in its Publication 555. In general, community property may result in lower federal capital gain taxes after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called "community property with right of survivorship." This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or another form of concurrent ownership) vary from state to state.
Because community property law affects the property of all married persons in the states in which it is in effect, it can have catastrophic consequences upon dissolution of the marriage from the perspective of the spouse forced to share a valuable asset which he or she thought was separate property. One of the most spectacular examples of this in recent memory was the 2011 Los Angeles Dodgers ownership dispute, in which Frank McCourt paid his ex-wife Jamie McCourt about $130 million to avoid a trial over whether the Los Angeles Dodgers were actually community property after the trial court ruled that the McCourts' prenuptial agreement was invalid. Indeed, one sign of community property's importance is that the states of Arizona, California, Idaho, Louisiana, and Texas have made it a mandatory subject on their bar examinations, so that all lawyers in those states will be able to educate their clients appropriately.
Consumers who are considering how to hold property during marriage should either research reliable legal source materials, or consult with a family lawyer, an estate planning lawyer, a Certified Public Accountant, or an Enrolled Agent. Furthermore, any professional consulted should be licensed in the state where the property will actually be held. In the example noted above, the McCourts' invalid agreement was prepared by a lawyer based in Massachusetts shortly before their move to Los Angeles.
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