Community Property: Half and Half

The laws of eight states and Puerto Rico—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington—provide that most property acquired during the marriage by either spouse is held equally by husband and wife as community property. . (Alaska and Wisconsin have some community property elements in their law but are not true community property states. For example, in Alaska community property is elective, and probably most spouses are not subject to the community property provisions.)

When one spouse dies, his or her half of the community property passes either by will or intestacy. The other half of the community property belongs to the surviving spouse. If you lived in one of the community property states while married, even if you don’t live there now, some of your property may be community property. The major exception to marital community property is property acquired by inheritance or gift.

Unlike joint tenancy, community property isn't automatically transferred to the surviving spouse. When your spouse dies, you own only your share of the community property, and if your spouse wants you to have his share, he must give it to you (or anyone else) in a will. Often the dead spouse's share must be probated, but it depends on what state you live in. California, for example, no longer requires probate for property passing directly from one spouse to the other.

This arrangement can affect your estate planning in many ways. What if your spouse assumes his or her life insurance will give you enough money and leaves everything to your grown children? In a community property state, that means half of the community property goes to the children. They now own half the house, half the car, half the vacation house on the lake. If there wasn't much cash in the estate or in insurance paid to them, the only way they can really benefit from the will is to sell the property so they can share the proceeds. You'll either have to move out and get another car, or they'll have to struggle along until you die. Married people in community property states should think long and hard before leaving property to anyone other than their spouse.

Know What’s Community Property

Community property laws affect how much of your family's property you can dispose of legally. When you're planning your estate, first determine what is community property and what is separate property. This is not always easy, and the rules vary from state to state. Your lawyer can help you figure out which is which, so that you know what property you can transfer through estate planning. A lawyer may also be able to help you get income tax benefits that may apply to community property if you ever lived in a community property state.