When planning an estate, understanding whether your state follows community property or common law rules significantly impacts how your assets are managed and passed on. These two systems differ fundamentally in asset ownership, division during divorce, and inheritance after death.
Origins and State Application
Community property law has roots in Spanish and French traditions and applies primarily in nine states including California, Texas, Arizona, Washington, Nevada, Idaho, Louisiana, New Mexico, and Wisconsin. This legal model treats assets acquired during marriage as equally owned by both spouses, regardless of whose name is on the title or who earned the income. Common law, derived from English law, governs the rest of the U.S., where property ownership depends on individual title and explicit ownership.
How Community Property Works
In community property states, most property and income gained during marriage—such as real estate, wages, and bank accounts—is owned equally by both spouses. Assets owned before marriage, gifts, and inheritances designated to one spouse remain separate property. Upon divorce or death, community property generally splits 50/50 unless otherwise specified in legal documents.
This system simplifies asset division but restricts one spouse from unilaterally controlling community assets without consent from the other. For inheritance, the surviving spouse typically receives the deceased spouse’s half of community property by default.
How Common Law Works
Common law states treat asset ownership based on whose name appears on the title or account. Property acquired in one spouse’s name is considered that spouse’s separate property unless jointly owned. This means that if a spouse dies or the couple divorces, property division depends on individual ownership and testamentary documents like wills or trusts.
Because assets are individually owned by default, estate planning in common law states requires detailed documentation to ensure your wishes are honored, such as naming beneficiaries on accounts or creating trusts.
Real-World Scenarios
Consider a couple residing in a community property state like Arizona who purchase a home during marriage with title in only one spouse’s name. Both spouses legally own half, and if one dies, that half generally passes to the surviving spouse unless stated otherwise.
Contrast this with a couple in New York, a common law state, where a house titled in one spouse’s name belongs solely to that spouse. Without a will, state inheritance laws may default ownership to children or other relatives, potentially excluding the surviving spouse.
Who Is Affected
Community property laws apply only to legally married couples in designated states. Common law rules govern other states but may be modified by joint ownership agreements or marriage contracts. Financial advisors, estate planners, and couples should be aware of their state’s property laws to create effective estate plans.
Estate Planning Tips
- In community property states, clearly identify which assets are community versus separate property to avoid confusion.
- Use wills and trusts to specify distribution of community property shares.
- In common law states, document ownership and name beneficiaries explicitly to prevent default intestate succession.
- Consider marital agreements, such as prenuptial or postnuptial agreements, to alter default property rules.
- Always consult an estate planning attorney knowledgeable about your state’s laws.
Common Missteps
- Mistakenly assuming all assets in a marriage are community property.
- Neglecting to update estate plans after moving to a state with different property laws.
- Overlooking how debts might be divided under community property rules.
- Believing common law states don’t require estate planning; without proper documents, the state’s default rules apply.
Frequently Asked Questions
Can a couple opt into community property rules in a common law state? Generally, no; community property laws are state-specific. However, some states permit “community property agreements” for couples relocating from community property states.
What happens if community property state residents move to a common law state? Property acquired in the original community property state usually retains that status, but new assets acquired may be treated under common law rules.
Does community property affect taxes? Yes. Upon death, community property often qualifies for a full step-up in basis for the entire asset value, which can reduce capital gains taxes. This advantage typically applies only to the deceased spouse’s share in common law states.
Summary Table: Community Property vs. Common Law
| Feature | Community Property | Common Law |
|---|---|---|
| Ownership of Assets | Equal ownership of marital assets | Ownership based on title name(s) |
| States Where Applied | AZ, CA, TX, WA, NV, LA, NM, ID, WI | Most other U.S. states |
| Property at Death | Half automatically to surviving spouse | Property passes by title or through will |
| Separate Property | Owned before marriage or individual gifts/inheritances | Individually owned |
| Estate Planning Need | Important to specify distribution in wills or trusts | Essential to avoid intestate succession |
| Tax Benefits | Full step-up in basis for entire asset | Step-up only on deceased’s share |
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Authoritative External Link
For detailed IRS guidance related to community property and income reporting, visit the IRS Community Property States page.